Discover the BEST KEPT SECRET in Real Estate;
Investing with an IRA!

You can purchase real estate with funds from a self-directed
IRA.  Income generated from the real estate can be TAX
DEFERRED and in some cases TAX FREE!

Real estate has historically proven itself to be a great vehicle for
both income and appreciation.  One real estate tool that is
available to real estate investors are government sponsored
retirement plans.  You may not be aware that you have the option to
direct your IRA into real estate. 

Types of property you can own via your IRA:

  • Single family homes
  • Apartment buildings
  • Condominiums
  • Mobile homes
  • Raw land
  • Commercial property

IRA Types 
There are two different types of IRA's:

  1. Tax deferred - These are the "tax deductible" kind of IRA's
    that allow yearly contributions to a tax-deferred account
    with pretax dollars.  This means that the money you deposit
    in your IRA is not taxed and you will not be taxed until you
    withdraw the money when you retire.
     
  2. Tax free - These are tax-free retirement accounts.  Also
    known as the Roth IRA, yearly contributions are made with
    after-tax dollars.  These offer no tax advantage in the year
    the contribution is made because the Roth IRA contribution
    is not deductible.  The advantage of the Roth IRA is that the
    growth of the retirement account is tax-free as well as the
    income disbursements made from it when you retire.

Both IRA types can be used to invest in real estate.  For obvious
reasons, most people would prefer to have the Roth IRA as the
vehicle for real estate investment because all income and gains
resulting from real estate transactions would be tax free.  The fact
of the matter is that most people have the traditional IRA.  Although
the income from the traditional IRA isn't "tax-free", it is
"tax-deferred".

First-Time Homeowner's IRA Break
If you are a first time homebuyer and you have a regular IRA, you
can withdraw up to $10,000 from your IRA to help pay for qualifying
"first-time" home buyer expenses.  The $10,000 limit is a lifetime
cap per IRA owner, not an annual limitation. 

The expenses qualify if they are used within 120 days of the
distribution to pay the acquisition costs for your new principal
residence. 

The rule says that the tax break is only available for "first-time"
home buyer expenses, but it doesn't mean that it must be your
first residence.  A qualifying first time home buyer is someone who
did not have a ownership interest in a principal residence in the
two year period before the acquisition of the new home.  If you
are married, you and your spouse must satisfy the two year test.

Note that the IRA imposes a 10% penalty if you receive a
distribution from a traditional IRA before age 59 1/2.  You are
exempt, as explained above, if you use the distribution for
qualified first-time home buying expenses.  If the money is from
a ROTH IRA however, the money must have been in the IRA for
at least 5 years. 

Self-Directed IRA
The IRA's above generally don't offer a way to use the funds in the
IRA to invest in real estate.  The self-directed IRA does.  With the
self-directed IRA the investor has greater control over how his or
her IRA funds are invested.  They present the investor with the
means to invest in real estate.  There are hundreds of companies,
or "administrators", that offer self-directed IRAs.  You need to make
sure that the company you look at allows the IRA to invest in real
estate before you give your money to them. 

Once you find an appropriate self-directed IRA, you will have to
roll over your existing IRA retirement accounts to one of the the
administrators offering the real estate investment option.  Most
traditional IRA, Roth IRA, Simple, or Keogh type of retirement
account can be converted to a self-directed IRA.  Your IRA
administrator will help you determine the steps needed to do so.

Example 1:  Heather is a simple homeowner who owns a couple
of rental properties.  She has an IRA with sufficient funds to
purchase another rental property.  Heather converts her Roth IRA
to a self-directed IRA and instructs the administrator to purchase
the rental property she wants.  She eventually purchases the house
and rents it to a couple.  The income she receives in the form of
rent is tax free.  Also, if Heather were to sell the house 3 years or
so down the line, the profit from the sale wouldn't incur ordinary
income taxes either.  All profits would go into her IRA account and
continue to grow until she retired. 

Example 2:  Jess purchases a parcel of land in Ventura,
California because in the last several years the real estate market
has exploded in the area.  He purchases this land with the hope
that it will grow in value as well.  To make it more attractive he
subdivides the land with the goal of selling it in smaller parcels. 
Jess purchases the land from his self-directed IRA and instructs the
administrator to buy the land with his IRA funds.  Over time the
smaller parcels are sold and all the profits from the sales would go
into his regular IRA account and continue to grow, shielded from
taxes, until his retires.

Note that if you purchase a "fixer" in an IRA, the funds that are
needed to make repairs must come from the plan itself.   Any
payment from outside the plan would disqualify the transaction.

Conclusion
The fact is that real estate investing within IRA's is one of the best
kept financial secrets around.  To learn more about this lesser
know real estate investment tool, we recommend the book, The Real
Estate IRA. 



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