Coming up with funds to purchase a piece of real estate can sometimes be tricky, especially if you can’t qualify for traditional financing. You may need alternative options to purchase that investment property of your choice. What if you find a property you like but you only have enough personal funds to purchase a percent of it? Did you ever consider using your retirement funds or using that old 401(k) to help make the purchase?
There are several different ways you can use your self-directed account in acquiring real estate investments. Your retirement account can make 100 percent of the purchase or you can use a portion of the retirement funds to purchase the investment. Not only is this a resource for additional funds, but the percent of the investment property that is funded by your self-directed IRA is tax sheltered! This means all income and expenses associated with the investment owned in the retirement account is tax-deferred or even tax-free.
For example, if you owned 50 percent of an investment rental property personally and 50 percent in the name of your IRA, you’d split all income and expenses 50/50. Half of the rent amount would go back to you personally and half would go back into your IRA tax-deferred or tax-free depending on the type of account you have. The same would apply for your tax bill and other expenses associated with the property: half would be paid personally and half would be paid by the IRA.
You are not limited to just purchasing a percentage of the property with your own IRA. You also have the option to partner with other people’s IRAs. If you know someone who is looking to build their retirement account you can partner with them. In this instance, their IRA would own a percent of the property and you would personally own a percent. Note here that you will also personally be responsible for any expenses and tax liability on income. If you want to defer all taxes, your IRA could partner up with someone else’s self-directed IRA.
Maybe you don’t want to partner with anyone, but you need extra funds to purchase the investment property. If you know someone with a self-directed IRA, they have the option to loan you money from their retirement account. You would repay the principal and interest directly into their IRA. This helps the lender grow their retirement account tax-free and is also a great way to get financing from some place other than a bank.
When dealing with a self-directed IRA to make any investment there are some restrictions. The property must be for investment use only and no personal use is allowed. Your IRA may not rent to, buy from, or sell to any disqualified parties such as yourself and all lineal ascendants and descendants. And lastly, as mentioned above regarding the percent of the property that is owned in the name of an IRA: all income and expenses must flow directly into and out of that account.
There are many ways to purchase investment real estate utilizing a self-directed IRA. If you have any questions about this article or want to know how you can fund your next investment please contact Brenda Whetsell with AdvantaIRA Trust at 239-333-1032 or via email at Brenda@AdvantaTrust.com.