Self Directed IRA’s – A New Option For Sonoma County Real Estate Buyers
November 9th, 2009 categories: Buyer Resource
Have you ever heard of a Self Directed IRA? If not, and you are a Real Estate investor read on to find out how you can benefit.
Cash Flow Real Estate
We have seen a lot of cash buyers in Sonoma County lately, and with an all cash bid, comes buying power. Most all cash offers come with quick closes, and all generally come with no loan contingencies, allowing these offers to rise to the top and in many cases allow buyers to pay less than competing offers that have financing as a part of the deal. Some people (mainly buyers who have been outbid by an all cash offer) are wondering how so many people can have enough cash to purchase a house. Many of these all cash buyers are actually using a little known technique to get access to large amounts of cash…the use of a Self Directed IRA to by Real Estate. We say this is a little known technique, as only 2% of the $4.2 Trillion IRA market is held in self directed IRA, however many savvy Real Estate investors know about them.
Given the unpredictability of the stock and bond markets, many people want a tangible asset they can “see, touch and feel”, rather than the ownership of a miniscule portion of a company that can change value daily. The Self Directed IRA option allows you to do just that, invest in Real Estate, a tangible asset.
A self directed IRA is no different than a regular IRA in terms of tax deferment, except that you can choose to invest in things classified as investments other than traditional stocks, bonds, and mutual funds. With that said, there are some different tax treatments of expenses when owning Real Estate in a Self Directed IRA as opposed to owning Real Estate traditionally. One wrinkle that Real Estate investors need to be aware of is that they must use an IRA Custodian Firm that keeps the Real Estate held within the IRA. The custodian firm charges a nominal annual management fee, however this is well worth it considering they keep your IRA “legal” allowing you realize from tax benefits. The IRS monitors self directed IRA’s closely, so this it is very important to make sure you can keep receiving the tax benefits.
A Self Directed IRA allows you to invest in all types of Real Estate
• Raw Land
• Commercial Real Estate
• Residential Real Estate
• Investment Properties, etc. (including seasonal rental properties…in this case, you cannot rent to your family or yourself…read below)
For your Self Directed IRA to remain “Qualified” you MUST FOLLOW IRS RULES! This is a very important, otherwise, you can jeopardize the status of your IRA, losing all tax benefits, and then be forced to pay hefty tax penalties.
One of those most important IRS Rules regarding Real Estate in Self Directed IRA’s has to do with who your tenants are. Even though you can purchase all types of Real Estate in your Self Directed IRA, YOU OR YOUR FAMILY CANNOT LIVE IN THE PROPERTY. This is after all an investment, if you live in the property it ceases to be an investment, but a primary residence, and there are already other tax advantages for primary residences.
Also, the investment must be funded entirely from the Self Directed IRA itself. This means that all Real Estate taxes, all repairs, and all expenses must be funded entirely from funds within the Self Directed IRA. Make sure you have enough liquidity in your IRA for these situations.
If you want to purchase Real Estate in your Self Directed IRA, and do not have enough funds for the transactions, there are options.
• You can partner with a funding source that does have the case. Typically, this means partnering with someone else who is in the same situation, or partnering with yourself, by using personal funds.
• Many large banks do offer loans to those who are using their Self Directed IRA to purchase Real Estate. Typically, these loans require a 30% down payment, as these are nonrecourse loans, and the banks cannot go after other assets in the case of a loan default. These loans offer competitive mortgage rates, and you should expect to pay market rates with no premium on these types of loans.
If you are considering using a Self Directed IRA to purchase Real Estate, make sure you discuss your particulat situation with a tax professional. Real Estate in general is a great investment in terms of tax benefits, and with an IRA, some of those benefits do disappear, ex: ability to write off expenses. The tradeoff in benefits between non Self Directed IRA Real Estate ownership and traditional Real Estate ownership is the primary discussion that should be had with your tax professional.
You can purchase Real Estate in any Self Directed IRA, whether it is a traditional IRA, or a Roth IRA. Both of these options have different tax treatements, each of which should be discussed with your tax professional.
If you have any questions about Self Directed IRA’s and how to use them to purchase Sonoma County Real Estate, please contact us for more details. If you plan to purchase Real Estate in a Self Directed IRA, we do not intend to imply you can only purchase in Sonoma County…we are just a little biased in our love for this area, and we continue to find many opportunities for positive cash flow investments at many different price ranges.
