By J.P. Dahdah, Founder & CEO of Vantage
Anytime one is presented with something new that may challenge their understanding of investing, a couple of things can happen:
They fiercely defend their actions and investments up until that point.
They immediately look for all the reasons why they should not follow your advice.
The secret to helping as many people as possible take advantage of the Real Estate IRA opportunity is to empathize with their questions, concerns, fears, and objections and then use sound knowledge to overcome them.
Here are common questions, objections, and concerns we see and how to help others through them to assist you.
- How do I know the IRS allows investing in real estate?
The IRS allows real estate investments. Go to the Internal Revenue Service website and request Publication 590 in the search window. On pages 40-41, you will see that real estate is not listed as a prohibited investment, whereas collectibles, life insurance, s-corporation stock, etc., are.
- Can I be the property manager for the properties held in my Real Estate IRA?
Yes, IRA account holders can perform administrative services for their own Real Estate IRA. Those activities include identifying tenants and choosing who will be maintaining or improving the investment property. However, Real Estate IRA account holders are disqualified persons, so they may not provide services to their own IRA in the form of labor, sweat equity, or other than administrative services.
- Can my Real Estate IRA obtain a loan?
Yes, but it must be a “non-recourse” loan. It is essential to understand that when you leverage your IRA, the retirement account is the borrower, not the individual account holder. IRA non-recourse lenders define their underlying criteria based upon the asset used to secure the loan. Not the IRA account holder’s creditworthiness. When a Real Estate IRA is leveraged, the account holder should also be aware of the Unrelated Debt Finance Income (UDFI) tax considerations that may apply and the potential for increased tax reporting and implications for the Self-Directed IRA.
- Can I partner my Real Estate IRA funds with my spouse’s Real Estate IRA funds?
Surprisingly, yes, you can, but you need to be very careful about the timing of when the partnership occurs. Once the percentage of ownership is established for a specific investment, the exact percentages must be maintained throughout the lifetime of the transaction.
- What happens if my Real Estate IRA does not have enough funds for maintenance and property expenses?
First, we must remind you that you cannot co-mingle your personal money with your Real Estate IRA funds to make up for any shortfalls. All Real Estate IRA expenses must be paid by the IRA directly proportional to the percentage of ownership in the asset. Some options include, but are not limited to the following: Contribute additional money to your IRA up to the annual limit, bring in a non-related party partner, sell your property as is, borrow money from a non-related party or make an excess contribution to your IRA (penalties apply).
- Do I need to establish an LLC to purchase real estate with my IRA?
No, establishing an LLC is not required to purchase real estate with a Self-Directed IRA, but it is allowed. Many IRA investors choose to structure their investments using an LLC for increased asset protection, improved transaction turnaround time and lower long-term IRA custodial fees. Real estate may be purchased directly with a Real Estate IRA or with an entity, whichever the investor prefers.
- How much money should I have in my IRA for it to make sense to purchase real estate?
There is not a minimum account balance needed to purchase real estate with a Real Estate IRA. The answer is a direct result of the type of investment strategy the account holder is seeking. A Real Estate IRA can be structured in various ways that allow for accounts with small balances to be utilized to purchase real estate.
- Can I do a 1031 exchange with my IRA monies?
No, and the good news is that you do not have to. A 1031 qualified exchange is a powerful tax deferral strategy for funds that are held outside of qualified retirement plans. An individual retirement account already offers all the tax deferral benefits typically sought after with a 1031 exchange, without any time or asset value limitations required for the exchange. You can partner IRA monies with 1031 exchange dollars to purchase a property, however.
- If I am a licensed real estate agent, can I represent myself in my Real Estate IRA real estate transaction and earn a commission?
No, you may not. Today, obtaining personal benefits, such as earning a commission, is not permissible based on rules outlined in Internal Revenue Service code 4975. You are allowed to negotiate a lower purchase price for the IRA instead of earning a commission. This provides for the IRA to obtain the benefits, not the account holder.
- Can I work on the property I purchased with my Real Estate IRA and invest in sweat equity?
Absolutely not! The account holder is considered a related party/disqualified person to the Self-Directed IRA. Providing services to the IRA in the form of labor or sweat equity is prohibited under IRC section 4975.
- Does my poor credit prevent me from purchasing real estate with my IRA?
No, it does not. An individual retirement account is a separate entity from you as an individual. Your personal credit plays no role in purchasing real estate with a Real Estate IRA. Your IRA can buy real estate with cash, as well as with a non-recourse loan. If your Real Estate IRA is purchasing real estate with a loan, the IRA is the borrower, not the individual account holder.