How do self-directed IRA's work and how can it be used to invest in RE?

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Submitted by flu on December 1, 2012 - 8:20pm

I read an article about how one can convert a traditional IRA and/or Roth IRA into a self-directed IRA. And from the self-directed IRA, it is possible to invest in real estate.

Anyone knows how it works?

Submitted by flu on December 1, 2012 - 8:23pm.
Submitted by flu on December 1, 2012 - 8:26pm.

duh...
We talked about this before. I was sleeping... Time to use the search button....

http://piggington.com/investing_in_re_in...

Submitted by no_such_reality on December 2, 2012 - 8:22am.

The real problem according to my tax guy is if you ever sell the property.

At least that's what I remember. But then again, the conversation was around the IRA owning an LLC and the LLC owning the property.

Submitted by SD Realtor on December 2, 2012 - 9:21am.

FLU please post some results if you find a good self directed IRA company with relatively low costs. We are looking at doing the same thing with our IRA money as well.

Submitted by flu on December 2, 2012 - 9:52am.

SDR. Ok. I will share when (not if) I find anything...

Before, I use to not actively manage my IRA/401k investments, simply because I stuck them in plan provided funds or did really boring things with it.
I felt that let the plan be on autopilot...

Now because of the pending tax laws, I'm making a major shift in in that I am going to do the opposite and use my 401k/IRA as my aggressive investment, and use post tax accounts to doing tax free/tax efficient index funds.

I started looking more closely on the 401k/IRA accounts. And some of those accounts performed pathetically over the past years. The article above summed up how I felt. There were years in which net was a joke.

Submitted by SK in CV on December 2, 2012 - 11:00am.

Investing in real estate through IRA's has some pretty major pitfalls. It can create a situation where IRA income is NOT tax free. Net rental income in an IRA is not tax free.

Submitted by harlyd on December 2, 2012 - 2:51pm.

The short answer is yes. See http://www.broadfinancial.com/self-direc...
There are 2 ways you can go about this.
1) You get a custodian who will be willing to allow non traditional investments. (Products that are not purchased on wall st.)
2) You get an IRA LLC, that means an IRA that invests in an LLC. See the differences here http://www.broadfinancial.com/self-direc...

The main differences are fees and how much time you will have to spend on paperwork. The LLC is a bit more to setup, but in the long run its more efficient.

Submitted by harlyd on December 2, 2012 - 2:56pm.

It is possible to have to pay tax, but that is in the case where the entire property is not wholly owned by the IRA. If the IRA does not own %100 of the property it can be subject to UDFI aka (Unrelated Debt Financed Income) http://www.broadfinancial.com/udfi

There are others things I would say to be aware of and that is prohibited transactions. http://www.broadfinancial.com/prohibited...

Submitted by usernamegary on December 2, 2012 - 3:44pm.

All IRAs technically are "self-directed". But as most banks and brokerages do not sell real estate, they are not generally willing to allow you to invest in it through them, though it is perfectly legal. Thus, "self-directed" IRAs are, for legal and tax purposes, treated exactly the same as any IRA.

Here is a link to basic questions and answers on investing in real estate with your IRA. These two links should get you started:
http://www.theentrustgroup.com/investmen...
http://www.theentrustgroup.com/learning-...

Good luck,

Gary

Submitted by no_such_reality on December 3, 2012 - 2:26pm.

harlyd wrote:
It is possible to have to pay tax, but that is in the case where the entire property is not wholly owned by the IRA. If the IRA does not own %100 of the property it can be subject to UDFI aka (Unrelated Debt Financed Income) http://www.broadfinancial.com/udfi

There are others things I would say to be aware of and that is prohibited transactions. http://www.broadfinancial.com/prohibited-transactions

A side effect of UDFI is you can't use a loan or mortgage to buy the property. You have to use all cash.

Submitted by kismetsdad on December 4, 2012 - 12:31pm.

Check out pensco.com. Lots of educational material. Not too hard to set up. Some fees however. I set one up and bought couple foreclosures a couple years ago. Allows diversification in retirement portfolio.

Submitted by harlyd on December 4, 2012 - 4:27pm.

no_such_reality wrote:

A side effect of UDFI is you can't use a loan or mortgage to buy the property. You have to use all cash.

That is incorrect. You can get a loan or a mortgage. The problem is you can't guarantee it since you are a disqualified person so that would be a prohibited transaction. See the ira mistakes http://www.broadfinancial.com/self-direc...
You would have to get a non recourse loan.
UDFI just means part of the IRA will be subject to tax since the part that is loaned is not tax free int the IRA.

Submitted by montana on December 4, 2012 - 11:18pm.

I have an IRA at E Trade. When a previous colleague of mine started his own company and looking for angel money, I provided an investment into his LLC with some cash of my own, and then an investment from my IRA. This way I was able to diversify my risk with cash and funds that I don't have access to for a number of years. E Trade acts as the Custodian, charges me an annual fee, and prepares a tax return for me based upon the K1 that the IRA receives. They have since stopped providing this service, but the annual fees are low so I haven't looked to transfer the investment to another custodian.

Submitted by IRAhelper on December 6, 2012 - 1:47pm.

flu, the wealthy have been doing this for almost 40 years. Real Estate investments with your IRA are very popular now due to the best buyers market in 30 years and the tremendous returns investors are seeing.

A great company to work with these types of investments is The iPlan Group out of Ohio (www.iplangroup.com). They have a great service model that saves a lot of administrative time and their fees are probably the best in the industry, especially for active investors who are doing a lot of deals or whose account assets are growing fast and to large amounts.

Also, whats really great is that they have active Real Estate investors on staff so for all of the RE Investors out there looking to self-direct their retirement, they get it.

If you want to talk with one of their IRA Asset Strategists they have this cool little tool that allows you to view their live calendar and schedule a time that works for you. You can access it here: https://my.timedriver.com/4678d33fb1b925...

Live free!
The IRAhelper

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