Great Opportunity: Self Directed Real Estate IRA & IRS Rules

Real Estate Agent with Prudential Network Realty

Last week I posted a blog about creating wealth through a Self Directed Real Estate IRA and why it make so much sense. My Husband has used this method of purchasing real estate in St. Augustine, Fl a couple of times. This week I wanted to address the IRS Rules regarding a Self Directed Real Estate IRA.  If you are considering rolling your current IRA or 401K into a Self Directed IRA there are some very important things that you must know about the IRS Rules.

There are Seven IRS Rules:

1. Any income you earn from the property must go directly to the IRA. For example if the property has a tenant the rent check is made out to your IRA, not to you as the owner.

2. All expenses on the property for maintenance, taxes, improvements, association fees, contractors, landscaping and other expenses are paid directly out of your IRA.

3. You cannot purchase property that you already own. That would be considered self-dealing and the IRS does not allow your Self- Directed Real Estate IRA to buy property from, or sell property to yourself, or any disqualified person. Disqualified persons includes you as the owner, or your  Spouse, your Parents, Grandparents, or Great Grandparents, Children and their spouses, Grandchildren & Great Grandchildren, and their spouses. 

Under the Internal Revenue code the term disqualified person does not include Siblings, Aunts, Uncles, or Cousins of the IRA owner.

4. You can't have indirect benefits such as purchasing a vacation property at the beach to use as a rental but then using it for yourself, or using office space in a building that you purchased through the Self Directed Real Estate IRA.

5. Not Enough Funds In Your IRA? You can purchase real estate in St. Augustine, Fl with all of the funds coming from your IRA, or by partnering with others (more on that soon) you can get a non-recourse loan through a lender. The non-recourse loan only uses the property for collateral and if you default the lender cannot go after the IRA, only the property.

6. Partnering with a Friend, Family, or Business Partner - Your Self-Directed Real Estate IRA can purchase an undivided interest in the property. The partner can contribute up to 70% if needed and your IRA would purchase the rest.

7. IRA investments that use financing that is a non-recourse loan will be subject to unrelated business income tax.

There are a number of companies that can assist you in setting up your Real Estate IRA. I would recommend that you contact a few companies to compare costs which we found to be very reasonable. You can go to google and find companies, or feel free to contact me and I will let you know who we used. This type of investing may not be for everyone but we have found it to be a very useful tool for generating signifcantly more income into his IRA than through traditional investment companies that trade only in stocks & bonds.


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