So, what are the most important things to know and understand so that when you find the perfect investment property you are ready to move in without hesitation or missing out on the opportunity at hand?
Game rules!
First, you need to understand that you are not actually buying the investment property that your IRA is buying. You must first transition your IRA to a self-directed IRA. In order for your IRA to buy investments, it must go through an IRA custodian. The custodian is the company that handles all your investment transactions and specializes in the self-directed IRA for investment real estate, in fact, they disburse all the funds for you. and keep the title in the name of your IRA.
For the IRA to be treated as a retirement investment and to be protected, it must have a custodian. Under the self-directed IRA, you can’t even put $1.00 of your personal funds into the deal or you can cancel the entire program.
These are some of the biggest mistakes people need to avoid!
1. Inadvertently grant personal guarantees.
You, as the account holder, are considered a “Disqualified Person” and cannot provide a personal guarantee of the IRA debt. To gain checkbook control of your retirement money, you’ll need to invest your account in a newly formed LLC that the custodian establishes. Let’s say you personally go to the bank and set up the account and the person at the bank asks if you would like a credit card as well, you apply and the approved card has just made a personal guarantee for your “Bad Move” IRA. The mere execution of such a personal guarantee constitutes an “extension of credit” and is therefore an automatic prohibited transaction even if the guarantee is never exercised.
2. The IRA owner attempts to make a contribution to the IRA by depositing it directly into the IRA/LLC checking account rather than through the IRA custodian. In essence, if he makes an annual contribution directly rather than through the IRA custodian, he is personally interacting with your IRA/LLC. That is considered a prohibited transaction.
3. The IRA owner personally enters into a contract on the real estate he intends to purchase with the IRA funds. Many investors wait until they find a property to hire the services of an IRA custodian or facilitator. Unfortunately, in doing so, they often suffer a “lost opportunity.”
A. A self-directed IRA typically takes 30 days to set up.
B. are not permitted under the Prohibited Transactions Code to use personal assets for the benefit of the IRA.
C. For example, suppose you find a large rental property that you would like to purchase as an IRA investment. If you haven’t yet established a self-directed IRA, you may lose the deal because you don’t have immediate access to your IRA funds and you can’t personally deposit your own deposit or enter into a purchase agreement. Remember, the IRA needs to buy the property, not you.
4. They do not assume UBTI. Unrelated business taxable income applies to passive investments in a going business. If generated, the IRA has to pay unrelated business income tax, and all bills related to the investment, it cannot use anyone’s funds.
5. Self-directed IRA clients use personally owned assets for the benefit of the IRA. For example, the use of a personally owned excavator and construction equipment to develop IRA property would constitute a prohibited transaction. There are multiple layers of problems with this scenario, because you’re mixing business assets and you also can’t use sweat equity, it will be counted as a contribution.
6. They believe that transactions with a non-disabled party cannot be prohibited transactions. This is a common belief that is simply not true. You, as an IRA owner, have a fiduciary responsibility to do whatever is in the sole benefit of your IRA. For example, an IRA owner could buy rental real estate and allow a sibling and her family to occupy the property. That would not necessarily be a prohibited transaction, but it does have the potential to violate the exclusive benefit rule if the rent was not set at fair market value and the terms of the ownership agreement were not enforced. The problem here is that as a landlord you have to evict tenants just like anyone else and renting to a family member could be a conflict of interest.
7. The attempt by the self-directed IRA holder to take a real estate commission on property bought/sold by the IRA. If the IRA owner is a real estate agent, he cannot receive a commission on the purchase or sale of his IRA property. He cannot receive personal compensation from any self-directed IRA investment.
8. The self-directed IRA enters into a de facto partnership where it lends money to a developer and, instead of making a loan with interest and payments attached, takes a portion of the proceeds. Although this is allowed, it is a de facto partnership that will generate Unrelated Business Taxable Income (UBTI). This would not be a problem if the IRA would lend the money at an interest rate that the market supports with a set monthly payment schedule.
9. Two self-directed IRA holders participate in a quid pro quo partnership to use their own retirement funds. For example, let’s say each person has $200,000 in a self-directed IRA. Then each makes a loan to the other for $200,000 to make personal investments. These loans are dependent on the other person lending the money and could be seen as using one’s retirement funds for personal benefit.
10. Self-directed IRA holders attempt to “disguise” active investments that can generate UBTI. Some self-directed account holders will place an ad in the newspaper to supposedly show their intent to rent an IRA investment property, but “conveniently” cannot find suitable tenants, so they use this as an excuse to sell it. Even if it were true that the IRA holder originally intended to rent the property rather than turn around and sell it, case law says that the most dominant factor is the purpose at the time of sale, not the time of sale. the initial purchase. . This type can make this transaction subject to UBTI.
The fact is that a self-directed IRA can be exciting, safe, and profitable, there are so many investment opportunities out there, but if you’re thinking about how you might be doing this type of investment, make sure you have the right people making sure you don’t commit mistakes that in the end can be very expensive.
To learn more about Real Estate IRAs, you’ll need to see a professional who understands the program before you even start looking for real estate.