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Wall Street Woes?

If you're like many Americans, your level of frustration with Wall Street and the long-term performance of your retirement account has peaked.  Let's face it; the stock market is a big fat mess.The sub-prime lending debacle turned out to be the tip of the iceberg of an otherwise latently disastrous financial market and you've likely seen your retirement nest-egg dwindle.  Market volatility and dreary returns have many wondering if their IRA or 401(k) is any safer than a Vegas wager and this is your retirement plan?  What next, the time-honored parachute of cash and bond instruments?  Not likely, since interest rates have remained low, those returns are so paltry that I'm ready to stuff my money in a coffee can in the back forty.

Hyperbole aside, there is hope--and I believe the best vehicle, time, place, and assembled crew of professionals are at your disposal to stop the hemorrhaging.  Maybe you're a boomer on the backside of peak earning years and don't have time to recapture recent losses.  Perhaps you're in a different category and just wish to add safety, diversify, and turbo-charge your retirement account.  No matter; you can use your IRA to purchase real estate and we're going to show you how.

Why don't more people know about buying real estate with their IRA?

The reality is that most folks don't realize it's a viable alternative, which is not accidental.  Traditional IRA custodians are banks, brokerage houses, or insurance companies and they're not in the real estate business.  Therefore, they do not permit nor will they recommend you invest your funds in such a manner.  For them to recommend you diversify your stocks, bonds, mutual funds, CD's etc., into tangible real property assets would represent an apparent conflict.  Moreover, they're often in direct competition with the growing number of self-directed IRA custodians that do offer such flexibility and control.  If that's not enough, little is written about buying real estate with an IRA in the more prominent financial publications and trade magazines.  Why?  Open up such a publication and you'll quickly deduce that the lion's share of advertising revenue comes from large brokerage houses and traditional investment institutions.  Finally, and in fairness to those institutions, IRA Custodians that do permit self-directed real estate transactions have only come to prominence over the past several years.

The Truth

Internal Revenue Code (Section 408) permits individuals to buy real estate with an IRA or other Qualified Plan; it has since advent of IRA tax-related law in the 1970's.  In fact, you can buy just about any kind of real estate you want with few exceptions.  If your current IRA Custodian does not permit real estate transactions, (most don't) consider changing Custodians.  There are an increasing number of excellent self-directed IRA Custodians that are easy to locate online; try searching "buy real estate with your IRA".  They do an excellent job of educating and assisting their clients.  Once you've set up an account with them, a "trustee to trustee" transfer occurs from your current Custodian to the new one.You can transfer some or all of your assets into a self-directed real estate IRA and this is a non-taxable event.

What You Can Do With Your Self-Directed IRA

Buy single and multi-family income-producing properties (rentals), condos, improved or unimproved land, commercial property, REO's (Real Estate Owned) by banks; post foreclosures, and more.  Direct your IRA to sell properties and even seller finance them to boost your returns; all proceeds remain in your IRA, deferring tax liability until distribution.  Buy real estate using your IRA funds and leverage the rest if you don't have enough for the purchase (must use a non-recourse loan, typically 70% LTV).  Or, buy multiple properties and control more real estate using leverage.  Pool your IRA money with others to purchase an undivided % interest, including friends, family, and business associates.  Form a Partnership or LLC for your IRA to buy property.  Buy rehabs, fix them up (must be done by a 3rd Party) and flip them for profits within your IRA.  Buy your retirement home at today's prices, and then take the property as a tax-free distribution using a Roth IRA.  Ensure tax-deferred status by avoiding "prohibited transactions".

It is important to develop a sound understanding of what you may and may not do to ensure compliance with IRS guidelines and to avoid potentially costly taxes and penalties.  A number of "prohibited transactions" must be avoided, so a tax consultant and IRA Custodian experienced with IRA-held real estate is essential.

It's really not so difficult, but you should know that you cannot use your IRA to purchase a property for personal use -- not even a vacation home.  In fact, the prevailing spirit of IRS tax law is that you may not use or personally benefit from your IRA-held real property at all, at least until distribution.  You cannot place property that you or your disqualified family members own or have ever owned into your IRA and you cannot lease property back from your IRA for business purposes.  Internal Revenue Code (Section 4975) defines "lineal descendents" and disqualified persons.

Additional matters of importance apply to the purchase, operation, and distribution of property within your IRA.  First, you cannot buy the property personally.  Funds used to purchase (including earnest money deposits) must come from your IRA and title must be taken by your IRA; you do not own it personally.  All funds associated with the purchase, operation (management) and income must flow from and to the IRA directly.  All expenses, including property taxes, insurance, property management fees and repairs must be paid by your IRA.  To that end, it is important to maintain enough resources within your IRA to cover such expenses; income flowing to the account and allowable contributions to the plan can help support that need.  If the IRA runs short on money to cover such expenses, you'll be forced to withdraw the property from your IRA and it could cost you plenty.

Next, many situations require that income producing properties must have a property manager in place, which in turn, distributes all monies directly to the IRA account.  Therefore, selecting a property manager familiar with self-directed IRA custodians is important (more on that later).

You may also sell property held by your IRA, but not to yourself or disqualified persons.  Upon the sale, the proceeds go directly back into the IRA and are ready for your next investment.  You may also seller finance to boost returns, in which case the buyer's payments go into the IRA.

Finally, taking a property distribution can come in one of two forms.  You may withdraw real estate from your IRA and use it personally once you reach 59 ½ or older and avoid penalties.  However, you will pay income taxes based on the value of the property unless it was held by a Roth IRA, in which case it is a tax-free; this makes the ROTH IRA very attractive in some cases.  The other option is to direct your IRA to sell the property, and then take the monetary distribution.  In that case, applicable income taxes will be due; always consult your tax professional.

Other Considerations

Using an IRA to buy real estate is not for everyone.  What we've discussed here is an overview of how to purchase real estate with a self-directed IRA or one of several other Qualified Plans.  If you have an employer-sponsored plan that either won't allow you to self-direct or transfer funds, this probably isn't for you.  If you're an individual with retirement plan assets and also have considerable liquid resources outside of your IRA available for investing, you'd probably be better served to invest in real estate in the taxable environment; it's likely a better alternative because you can take advantage of the deductions and depreciation allowances.

How to Get Started

All of this may seem a bit complicated at first glance.  However, it's really quite simple, particularly if you assemble the right team of professionals from the start.  As a review, here's what needs to happen:

Select a self-directed IRA Custodian if you don't already have one and open an account.  You may transfer some or all of your money into such an account as a tax-free event.  Select an experienced, reputable real estate professional familiar with investment property transactions.  Select a professional property management company (if buying income producing property) experienced at working with IRA Custodians and their process. 

The Right Team; a One-Stop Solution

At Lake Conroe Realty, we offer a complete real estate investment solution.  We have closed hundreds of transactions on behalf of our investor-clients and are ready to assist you.  As importantly, and in order to avoid a complicated and disjointed process, we offer a bundled solution with our in-house property management.  That is to say, we can assist you in selecting the best property to meet your investment objectives, provide a seamless transition into the leasing and property management phase, and work closely with your IRA Custodian to simplify the process.  Call us now to learn more about how we can help you super-charge your retirement plan's performance and how we can package services to create additional value.  For more information, visit us online at www.PurchaseRealEstateInYourIRA.com.

About The Author

Eric Yeargain is a Broker Associate of Lake Conroe Realty and Advantage Asset Management, a full-service, in-house property management solution.  Eric has been awarded the "Top Producer" designation in successive years by the Houston Association of Realtors® and is a member of the National Association of Realtors®, and the Texas Association of Realtors®.