In a real estate market where all-cash offers can win a bidding war for a house for sale, either from families or real estate investors, a self-directed IRA can be a way to win that war without pulling cash out of your pocket.
Retirement account holders and wealthy foreign investors can often pay entirely in cash for a house in the U.S., beating out first-time home buyers who may have difficulty qualifying for a mortgage loan or other financing. For investors with an IRA, they can use that money to buy a home with a negotiating tactic that’s often successful: cash.
As an alternative to the stock market, income-producing real estate properties can provide long-term income and appreciation gains for real estate investors while allowing investors to continue earning tax-free IRA benefits in their retirement portfolio.
A self-directed IRA can be used to simply write a check from traditional IRA or Roth IRA funds to buy real estate in the United States or around the world. All of the income and gains associated with self-directed IRA investments grow tax-deferred.
Allowed by IRS
Self-directed IRAs, which are also called real estate IRAs with checkbook control, are allowed by the IRS for real estate and other investments tax-free without custodian consent. The IRS allows real estate to be held inside IRA retirement accounts. Investments with a real estate IRA are allowed under the Employee Retirement Income Security Act of 1974.
It allows the establishment of a limited liability company, or LLC, that is owned by the IRA owner in care of the Roth IRA custodian and is managed by the IRA holder or any third party.
As manager of the IRA LLC, the IRA owner will have control over IRA assets to make traditional as well as non-traditional investments, such as real estate.
With “checkbook control,” real estate investors can make investments quickly without having to wait for the custodian’s consent.
Along with not having to seek the consent of a custodian to make real estate investments with a real estate IRA LLC, investors won’t be subject to custodian account fees based on account value and per transaction.
Help for real estate investors
With this LLC set up, you can write a check or wire funds straight to your self-directed IRA LLC bank account to make the investment. This allows you to make quick real estate investments when the opportunity presents itself, a tactic that can come in handy when multiple offers are coming in quickly for a home you want to buy. Custodian delays could cause you to lose an investment opportunity.
Real estate that can be bought with a self-directed IRA LLC include residential or commercial property, raw land, foreclosure property, mortgage pools, deeds, tax liens, vacation homes, rental units, condos, farm land, industrial buildings, and foreign residential property.
A self-directed IRA can be used to pay a property with cash, but it can also be used as a non-recourse loan to pay for a real estate investment. A non-recourse loan is a laon secured by collateral that the borrower isn’t personally liable for. A recourse loan, which isn’t allowed when using IRA funds, is a loan where the borrower is personally liable.
If a non-recourse loan is used, the debt-financed portion of the investment will likely trigger a tax under the Unrelated Debt Financed Income rules.