There has been a lot of money made in real estate during the past 10 years when investors used their IRA to fund their deals. Unfortunantly for many ‘regular’ stock investors they’ve been sitting on ‘cash’ for the last years waiting for the stock market to come back while they could have been making real money in real estate using their IRA (or other retirement accounts) funds.
There are 2 main types of IRAs. The traditional IRA where the contribution to your IRA is not taxed but when you take the money out after retirement the money is taxed at that time. The taxes are just deferred to a later date.
The 2nd type of IRA is the ROTH IRA. Your contribution to the ROTH is taxable before you put it into the IRA but there is no tax when you take it out. Thus you do not pay any tax on the growth of the IRA money. It amounts to a tax-free investment.
With either one, you can still invest in non-stock investments and you can still make money in real estate.
There are a lot of pros and cons about investing your IRA funds into real estate deals. First of all you have to know some basics about the restrictions on the use of IRA investments. This strategy may or may not be right for you.
Some of the restrictions include selling your own real estate or personal property to your IRA, buying anything from your IRA, your company buying something from your IRA, using the IRA as security for a loan, buying from or selling to or working with a disqualified person (anyone who can influence or benefit from the deal) and certain family members and many more restrictions. Do any of these forbidden transactions and you’ll be on the fast track to NOT making money with any kind of real estate.
When it comes to making money in real estate using your IRAs…With every transaction you have to be very careful to follow the rules. Some of those rules can be found in the IRS code section 4975. Other government agencies, including the department of labor also have rules relating to retirement accounts. Consult with your real estate and tax attorney before you invest your IRA.
Some of the transactions that IRA money may be used for are;
- Purchase self-storage business
- Loan to other REI deals
- Purchase loans, notes, mortgages
- Buy property using a Qualified Personal Residence Trust (QPRT)
- Use a Grantor Retained Annuity Trust
- Buy Tax Liens on property
- Lease or purchase commercial or residential property
- Purchase single family homes, condos
- Buy mobile home park business
- Invest in a shopping center
- Be part investor in a building complex
- Own and rent billboards
- Use funds for factoring
- Buy land with timber rights, land having a good timber stand already established
- Purchase bad debt from places like Visa, MC, banks
- Purchase oil, gas or water rights
- Invest in options on commercial business, commercial property, residential property
- Own an LLC in your IRA
There are stiff fines when you use your own IRA money (or the properties you purchase with your IRA money) for personal use. There are not a lot of restrictions about what type of investment you can use your IRA money for.
But the restrictions come into place in the “who, what, when” and how they are connected with the transactions.
Example; You may not invest with your parents but you may invest with your sister except, if she has any influence over your decisions, or if you may get any other personal benefit from because of the investment, or if she works with you any other business, and on and on. It is important that you know who is a “disqualified person” as defined in the IRS code 4975.
In 2010 you can convert other retirement accounts to a ROTH IRA. The income tax may be able to be paid over 2 years (2010 – 2011 tax years). (We say 2010 because the law may change. To keep up with Tax Law Changes for Real Estate Investors, see our other blog)
When you get all the prohibited transaction and disqualified persons straight in your head, then investing with your Roth or Traditional IRA can be very lucrative. It’s one of the best ways to make money in real estate, hey…You may be able to live a tax-free life style.
As with any government related regulation, there will be changes in the laws. You need to get all the information you can even before you go to your real estate and tax attorney.
It would also be a very good idea for you to read the actual law. I am not trying to make you an attorney but it is up to you to abide by the law.
You need some understanding of the restrictions about making money in real estate using your IRA. Be prepared so you can ask the right questions.
We cover this topic regularly through various articles and blog posts, subscribe to this blog in the right column and you’ll be set to receive new information, tools and tips as rules and regulations change. See subscribe in the right column.
Also, there are allot of changes to the 2010 and 2011 tax codes that affect the Real Estate Business in big ways. See New Tax Changes 4 Investors Here.
Remember, There are a lot of good ways to make money in real estate. Commercial Real Estate investing is one of them, and one of the easiest ways to both finance your purchases and build your retirement accounts is to be your own bank using your own IRA funds to purchase your real estate deals.