Self- Directed IRA’s: Investing in Real Estate

A self-directed IRA is unique due to the available investment options and because it puts the owner in control.

What is a self-directed IRA?

Technically, a self-directed IRA is not any different than other IRAs (or 401ks). IRAs were created by the government to permit investments to grow tax-free or tax-deferred, compounded over time, to maximize growth. The IRA can also qualify for yearly tax deductions (depending on account type), provide asset protection, and may be passed to future generations for qualifying accounts.

Most IRA custodians (e.g. Charles Schwab, Equity Trust, or TD Ameritrade) allow only approved stocks, bonds, mutual funds, and CDs. A truly self-directed IRA allows this type of investing in addition to real estate, notes, private placements, tax lien certificates, and much more.

Self-directed IRAs are not for everyone. They are for individuals who want diversity in their portfolio and control of their financial future. They want to create wealth using their knowledge of investments outside of the more traditional stocks, bonds, or CDs.

What are the benefits of a self-directed IRA?

You have the potential to create lasting wealth by investing your tax-advantage dollars in assets you know and understand.

With a self-directed IRA, you can loan IRA money to non-disqualified persons (disqualified persons being spouse, parents, children or in-laws), while keeping all tax benefits associated with IRA accounts. The IRA can receive principle and interest just like a bank.

What are the advantages of investing in real estate with a self-directed IRA?

Real estate investment does not have to be limited to homes and rental properties. Farmland; commercial property—like self-storage—deeds of trust, and businesses, offer investment options that can provide additional control over your finances.

The stock market is typically volatile and subject to dramatic day-to-day swings. Although, not often, a stock can fall to a worth of zero dollars. When you diversify from stocks, you hold tangible assets. Unlike stocks, these assets provide steady appreciation plus cash flow into your self-directed IRA. For this reason, many investors hold real estate in their portfolios so that they are not bound to the stock market.

What are the rules associated with a real estate IRA?

  • You cannot stay overnight – even one night in a rental property.
  • You cannot permit any disqualified persons (spouse, children, parents, or in-laws) to stay overnight in a rental property.
  • You cannot use the property to benefit any advisor who works with you on your IRA.
  • You cannot rent the property to yourself, nor to any disqualified persons, even at market rate.
  • You cannot buy or sell any of your own personal property to your IRA, nor may any disqualified persons.
  • You cannot intermingle IRA and non-IRA funds.
  • You cannot take money out of the IRA unless you take it in the form of a distribution, which may be taxable. There may be penalties involved for early withdrawals.
  • You cannot lend money to your self-directed IRA, nor borrow from it, nor can any disqualified person.
  • Your IRA cannot contract for goods and services with you, nor with any entity that you or any of the above disqualified persons control.

How should I plan my next steps and exit strategy?

The life cycle and direction of your self-directed IRA investment are your decisions. If you want to sell an asset, complete a Sale Direction of Investment form and include supporting documentation. The asset is removed from your IRA in exchange for the proceeds of the sale.

You may also distribute cash or assets from your account by completing a Distribution Request form. Or, you may elect to hold the asset to pass on to a beneficiary after death to create a tax-advantaged legacy.

Remember to consult with a tax attorney or other financial professional prior to making any financial decisions.