Self Directed IRA’s

 

 

The self directed IRA has been available since 1975, but, for the most part, only investment analysts and banks new about it. They never mentioned it because they could not buy alternative investments, like real estate, for you and they certainly would not want you to move your money from their operation.  When buying real estate with a self directed IRA you must use an independent custodian or facilitator.  They are the ones who manage your asset and file the necessary IRS paperwork.  The IRS regulations state that a real estate transaction is possible provided that the IRA does not provide current benefit to you or other “disqualified” persons (spouse, parents, children, grandparents). In other words, these people cannot live or vacation in a Self Directed IRA (SDIRA) property owned by one of them.  An SDIRA property is a business property and must be used accordingly.  It is estimated that $2 trillion dollars will be invested over the next few years into SDIRA accounts further demonstrating people taking control of their retirement accounts.  Another little known fact is that self directed IRA’s can take advantage of mortgages (non-recourse loans only) to leverage their investments in real estate.  However, any profit generated by the investment, including capital gains, is subject to UBIT (unrelated business income tax) on the portion attributable to the borrowed funds.  For example, if you sold a property which was bought using 50% direct IRA funds and 50% mortgage monies, one half of the gain would be subject to UBIT at a maximum tax rate of 35%.  Make sure you take this into account when estimating your return on investment (ROI).

 

When setting up your self directed IRA, be sure to research the fee schedules of potential custodial entities (fees can mount up quickly as this is how they make their money) and look into creating an IRA-LLC or Corporation for your IRA to invest in.  This may give you more flexibility and speed to your transactions and reduce the amount of fees charged by your custodian.

 

While not for everyone, self directed IRA’s can facilitate alternative investment choices, and commensurate returns, for individuals willing to do the research and actively manage their retirement assets.