IRA's and Real Estate
USING IRA SAVINGS (AND OTHER "QUALIFIED" FUNDS) TO INVEST IN REAL ESTATE
Most investors believe they cannot use IRA money to buy real estate. Developed or undeveloped. They are wrong.
You can invest IRA money in a wide range of investments, including stocks, bonds, mutual funds, money market funds, saving certificates, U.S. Treasury securities, promissory notes secured by mortgages or deeds of trust, limited partnerships and
real estate. That includes houses, condos, office buildings -- even if located in another country. You cannot; however, use IRA money to buy your own residence, or any other property in which you live. It has to be investment property. But when you retire, you can direct your IRA to turn it over to you as a distribution, at the current market value.
Given the real estate boom of the 1980s, and its current resurgence, it's curious that so little is understood about the real estate IRA." IRA accounts invested in stocks, bonds and other financial paper are very lucrative for banks, mutual funds, insurance companies and brokerage houses. These institutions will gladly act as your trustee (the middlemen in all IRAs) and sell you their wares. But they won't act as your trustee if you want to buy real estate with IRA money. Why? They have too much to lose because they're not (nor can they be) in the real estate business.
So you're pretty much on your own investing in a real estate IRA. You have to find your own property, trustee and perhaps a management company, to collect rents and maintain the property. First, contact an independent trustee (see below) to open a self-directed IRA or convert your existing plan structure. This trustee must follow your "self-directed" instructions to the letter. Second, sign broker-to-broker papers that will transfer designated portions of your existing IRA to your self-directed IRA. Finally, find and buy the property using a real estate attorney to create the usual documents. Remember, you must clearly explain your IRA ownership and goals to them. Then, the trustee will take title at your direction.
The rules governing real estate IRAs are strict:
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The house or property must remain in the trust until distribution at retirement.
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It must be treated like any other investment.
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You cannot manage the property. But your trustee can hire a third party -- a real estate broker, or local manager -- to collect rents and maintain or improve the property.
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All rental profits must be returned to the trustee.
The biggest drawback of the real estate IRA is that it may lack the funds to make a substantial purchase. At present, it is controversial as to whether your IRA can take a mortgage, or if this would violate several IRS provisions and render all of your IRA assets taxable. Most expert advise: Don't use IRA money as a down payment and take a mortgage for the balance due.
Until the IRS clarifies borrowing rules, a special technique allows you to participate in real estate ownership through your IRA, even if there is not enough in capital to pay for the entire parcel. That technique consists of buying fractional shares of property through the use of a general or limited partnership.
For more information on these types of transactions and other important information concerning IRA, Roth IRA, SEPA and 401(k) accounts, click on the links below and browse the websites of the following firms. Each of these firms can act as Trustee for your sel-directed plans: http://www.sterling-trust.com/realestate1.html, http://www.flexira.com, http://www.trustetc.com/links/realestate.html
