Using a self-directed IRA to invest in real estate

Investment Real Estate is a Growing Asset Class

According to Morgan Stanley, US millionaires view real estate as the top alternative-asset class to own in 2013. Almost 60% of those surveyed expect to add to their real estate investments, whether through a Real Estate Investment Trust (REIT) or direct ownership. Many IRA holders see the same opportunity and decide to join thousands of NuView clients in adding property to their portfolio.

Depressed prices have stimulated the investors

In certain regions of the country, depressed prices due to foreclosures and bank owned property have stimulated the investors due to enhanced cash flow opportunities. Properties that were historically purchased and held for appreciation, now can provide income to the IRA as well. In addition the unprecedented displacement of families from the economic downturn have increased the demand for rental properties, as few new units came on the market during the past eight years.

Types of Real Estate an IRA can Hold

Single Family Homes

A free standing residential building.

Co-ops

An association of people who cooperate for economic benefit.

Commercial Property

Business or land intended to generate a profit.

Apartment Buildings

A building consisting of rented self-contained housing units.

Condominiums

A building consisting of owned self-contained housing units.

Unimproved land

Land without basic required services.

Why Hold Real Estate in an IRA?

Most investors seek out real estate for certain tax benefits, such as depreciation, long-term capital gains, or they utilize tax deferring exchanges to move from one investment to another.  The benefit of holding rental real estate in an IRA is that there are no taxes due as long as the investment has not been distributed to the IRA owner.

All expenses are paid by the IRA, and all income belongs to the IRA.  When properties are purchased with cash from an IRA, no taxes are due when rental income is received, or when the property is sold.  There is no need to go through the expense and complexity of 1031 tax deferred exchanges, as the entire IRA is tax deferred (tax free within a Roth IRA).  While certain investments held within an IRA may be subject to Unrelated Business Income Tax, rental real estate enjoys a special IRS exclusion, allowing all income to return to the IRA tax free. Taxation only will occur when a distribution is taken, but a piece of property may never be taxed if it is owned in a Roth IRA.

Funding the Purchase of Real Estate in an IRA

Cash – the IRA pays cash for the entire property
Partnering – an IRA can purchase fractional ownership in property
Financing – IRAs can mortgage real estate with a non-recourse loan

Please note that any property purchased in an IRA must be titled: NuView IRA FBO (For the Benefit Of) Your Name IRA. Once all closing documents are read and approved by the account holder or a designated interested party, NuView can execute the request and send funds to the closing within 48 hours. The IRA now owns the property.

Real Estate Purchase Process

Step OneSet Up
1) Set up and fund a self-directed account with NuView IRA

Step TwoIdentify
2) Identify the piece of investment real estate

Step ThreeSubmit
3) Submit a Purchase Authorization and the contract to NuView

My IRA Owns Property – Now What?

IRA account-holders invested in rental or leased real estate are encouraged to retain the services of a non-disqualified party to serve as property manager and oversee rental property activities. A property manager may be able to respond to tenant or property emergencies and quickly pay for unexpected expenses. When an IRA owns real estate, the IRA must pay all expenses related to the property. If the IRA owns an undivided interest in the property, then the IRA must pay the pro-rata portion per its undivided interest. The IRA owner can direct NuView to pay the expenses by simply submitting a Payment Authorization Letter along with the invoice to be paid.

With a self-directed IRA, the opportunity to take control is significant.

The IRS does provide rules about IRA holders and other “disqualified persons” as it relates to the usage of the property once purchased.  These people, as defined in IRC Section 4975 cannot get a beneficial use from the IRA owned property.  Simply stated, they cannot use a vacation home on an interim basis between rentals, regardless of what rent they paid back to the IRA.

The IRA holder gets to make all the decisions not just in the purchase process, but also in hiring the property manager, what to charge for rent, hiring subcontractors to rehab the property, negotiating contracts, or working with the property manager to screen tenants.  With a self-directed IRA, the opportunity to take control is significant.

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