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Investing in a Real Estate in an IRA

Real estate IRA

You can buy real estate in your IRA and people have been doing it for a long time. When someone says oh real estate is never supposed to be in an IRA that might not be an educated idea to have.

Real estate has historically provided a fantastic rate of return, and it should be included to some extent in your IRAs, 401ks, and other tax-deferred vehicles.

What are rules and key information?

The rules are that you can only buy a property with your IRA if it is for rental purposes. You cannot use the funds to purchase an investment or vacation home, and they must be used as income-producing properties in order to qualify under IRS guidelines (IRS Publication 560).

The other key thing to know about buying a property within an IRA is the tax breaks on any capital gains. Because when someone invests their money into something like stocks then sells them at some point down the line those profits will go back onto his/her taxes.

But not so much here where he's buying real estate investments through IRA which means all these benefits come without having anything taken out from what was earned by selling off.

Why to buy a real estate in an IRA?

Low paid interest rate on your mortgage

You can deduct the interest on your mortgage, which is not allowed when you borrow from a non-retirement account.

This means that if we assume $200k in debt and then take out another loan to buy real estate with it (say at 12%), we will owe about half as much money over 30 years because only 50% of the loan would count against income taxes, whereas 100% of all other loans taken outside IRAs are counted fully towards taxable earnings.

Tax deferral benefits

The other benefit is tax deferral, which can help people who don't need access to the funds right now but want a way of saving without paying any interest on those savings.

Increased diversification in retirement portfolio

The third benefit of purchasing real estate inside an IRA is that it can help the investor to diversify their portfolio.

Buying real estate inside an IRA is a way of investing in something that has historically been very stable and safe, which many people are looking for these days when they're trying not only to save money but also to protect themselves from any potential economic downturns or other unforeseen events like natural disasters.

The Tax Benefits on inherited assets

The fourth benefit I want you guys take away today about buying property through your retirement fund (IRA) as opposed with outside IRAs: The tax benefits!

If someone inherits his/her own account then he may have more control than what's available through traditional inheritance rules where heirs must use assets within five year period after death.

Freedom to buy property in any state you want

The fifth benefit of purchasing real estate inside an IRA is that you can use your IRA to buy real estate in any state, not just the one where it was originally established.

No income restrictions

The sixth benefit of buying property through an individual retirement account is that there are no income restrictions on who may invest inside their IRAs as long they have earned enough money during a given year and meet other requirements set by law.

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Let's talk about how the actual process work.

How does the process work?

Here are the important steps to follow buying a real estate property within an IRA?

1. Get IRA money to a self-directed custodian

You've got to get IRA money to a self-directed custodian. In the Wall Street world, you would call this a stockbroker or a brokerage account. But in the IRA world, it is called a custodian.

You may have an old 401k rolled out to the IRA. Let's take that IRA and put it in a custodian account. I know you may put new money in an IRA, but it may not be enough to go out and buy a piece of property.

However, if you have old IRA money and old 401k money, let's get that money to a self-directed custodian. If you're doing research, you'll find a list of reliable custodians across the nation that fits your style. But these custodians will hold the money until you call one day and say I'm ready to invest. So get that money to a custodian as your step one.

2. Decide what you are going to buy

You've got to decide what to buy. Because it'll dictate the type of vehicle you'll use. Decide what type of real estate investment you will make. I mean it can be a single-family home, a mobile home, a commercial building, or the process of doing some rehabbing or wholesaling.

That'll really dictate what kind of structure you'll invest in. Don't think I'm just using a trust or using an LLC, and I'm done. Be careful when deciding what type of property you're going to embark on, and be clear about that. Be clear about this investment strategy as it will dictate the next structure.

3. Set up your LLC

Your third step is to set up an LLC. The LLC (limited liability company) you want to set up should be in the state where you are going to purchase the real estate.

You can't open your LLC in Portland and buy real estate in Nevada. That's common sense, isn't it? You need to set up a well-crafted LLC operating under the agreement that has ERISA and IRS provisions.

You should expect to pay more than $1,500 to get an LLC to hold real estate owned by your IRA. Your IRA will hold the LLC, and your LLC will hold your real estate. At this stage, you want to work with a company that can help guide you through the process.

Once again, your LLC should be strictly established in the state where you are going to own the real estate. You might want to register it as a foreign one in your own state. If you live in California, that's a typical problem.

Because California's going to want you to register in their state even if your LLC in Georgia. You have to register it in California and pay their darn $800 minimum tax which is really bad.

But LLC is critical to holding the real estate and holding the checkbook to purchase the rental property.

4. Manage your LLC to purchase real estate

Next, I want to talk about the acquisition of real estate in LLC management. This is an important step in the management of LLC. There are going to be some limitations. To have more information, you need to go through all the details with your law firm when you set up an LLC.

5. Fund your LLC. & Initiate the purchase

To purchase real estate you need to have funds in your LLC account. Transfer funds to your account and buy your property.

6. Have support of a law firm if you feel the process complicated.

If you feel the entire process is too hard to follow get the support of a law firm. An experienced firm should help you along the process.

In short, your LLC is going to let you have a checkbook. You will be the manager of that LLC. You can be the signer of that checkbook. If your custodian says you can't you've got the wrong custodian. That's the rule of your custodian not the rule of the IRS. 

Custodians have their own internal guidelines. The law firm representing you should help you to design your LLC so that you can manage it effectively. You can buy real estate, you can control the checkbook but you cannot provide sweat equity.

You can't go out there work on the rental property. You need to have a third-party to manage the room rental real estate. You also have to use a realtor who can't be yourself. So you've got to be cautious on the acquisition but you can definitely manage that LLC.

Once you've got your LLC funded, you're out there. You got the checkbook you would write an offer to go buy a piece of real estate.

Then you will start to go through the closing process. You cannot cosign on the loan or use your credit to get that loan. You have to use a non-recourse loan. But that all is still very exciting since you don't have to buy real estate using your cash. 

You can pool your money with other people and leverage your money in a sense with other partners or you can get a non-recourse loan. Banks will loan you money usually about sixty cents on the dollar when you put 40% down and keep some part as the reserve. It is a very common practice.

Yes, it can be an exciting process of managing the LLC. Now finally let's talk about annual maintenance.

This is a big topic. I'm just trying to get the highlights. But once you have your LLC is set up your buying real estate you may need to file a tax return annually. There's taxes that could occur called unrelated debt-financed income. If you're flipping properties not rentals there will be the UBIT tax or unrelated business income tax  or taxable income.

The whole process can be very low-maintenance. You may file an annual tax return an annual evaluation to give your custodian. but you shouldn't have to stress about the whole process. People have been doing this for over 30 years. It's very common and it's certainly legal.

Hence, if someone said you can't do it, it's not that you can't do it. It's maybe that they can't do it because they're your stockbroker or their custodian rules don't allow for it.

But get a law firm behind you. If it's not a law firm, that's when you get someone else to write you a comfort letter and give you guidelines so they can stand behind and help you. Set this up and then maintain it for many years to come.

Bottom line, you should get out there and invest with your ira. Invest in what you know best.

I think having a rental property in your own name and your own LLC is owned by your trust, and having a rental property in your IRA and that owns LLC and you're out there getting a better rate of return in your IRA. Finally, don't be afraid to have a rental property in your IRA.