Have you ever wondered what the difference is between a good retirement and an amazing retirement?
Well… I’ll give you a hint and you’ll be glad you did! It starts with R and ends with eal Estate!
Jokes aside… buying real estate within an IRA is not that difficult. There are just a few simple guidelines, and we’ll go over a few really quick ones. Using your IRA for real estate investment purposes can increase your earnings and secure your future, as long as you find the right deals and follow the rules. First, let’s remove the rules, and then we’ll get to the right type of property to look for.
When you buy real estate inside an IRA, you’re not supposed to profit from the transactions today…just in the future. Therefore, you cannot benefit directly or indirectly from a purchase you make. That would be called “auto-trading” or would fall under the “Indirect Benefits Rule”.
For example…if you use your IRA for real estate investment purposes, you (or other disqualified persons) may not live in a home owned by the account…rent a home or office owned by the account…or take a vacations in a property owned by the account. A “disqualified” person, under this rule, would be you, your spouse, your children, your spouses, your grandparents, your parents, your grandchildren, and the custodian of your account… yes… even the family dog. .. at least I think so, haha.
Interestingly, brothers, sisters, aunts, and uncles are NOT disqualified, so they might get some current benefits when buying real estate within an IRA they own, but you may want to keep that information to yourself. Otherwise, the beach house could be reserved for years with no rental income.
Another important rule that applies to the use of an IRA for real estate transactions is the following. You don’t have to have 100% of the purchase price to make the deal. You can partner with others or get bank financing, which starts to get you into the kind of deals you should be looking for.
Also, when you buy real estate inside an IRA, you’ll get the most profit and pay the least taxes if you look for “cash deals,” in other words, those that can be purchased directly with the funds currently in the account. You can take out a mortgage and keep it in your IRA for real estate investment purposes, but of course you’ll pay interest and be subject to other taxes.
Let’s see how a cash offer works very quickly. You find a house that is up for auction. You win the $40,000 offer. You instruct your custodian to write a check. A year later, after making some repairs, which are paid for with funds from his retirement account, he sells the house for $80,000. Earnings go into the account and are not subject to capital gains or UBIT (unrelated business income tax). That is one of the biggest advantages of using an IRA for real estate investment. You can keep more of your earnings, because they are not taxed.
On the other hand, if you must have a portion of that $40,000 financed, your earnings would pay UBIT. In any financed deal, all profits are taxable under UBIT.
There is much more to learn about buying real estate within an IRA. That was just a little tidbit to get you started.
Folks, make no mistake about it…if you’re looking for the best way to blow your retirement account through the roof…real estate is where it’s at!