Entrust Learning Center > 5. Real Estate > Buying Property With 401(k) or IRA Funds

Buying Property With 401(k) or IRA Funds

If you are one of the many people interested in purchasing real estate with a Self Directed IRA..please read on..

By: Jim Hitt

The volatility of the stock market and the economic uncertainty have left many people searching for ways to invest their money outside of the stock market. In fact, Entrust has been flooded with e-mails from investors asking how they can purchase real estate with their Self Directed IRA. So, if you are one of the many people interested in purchasing real estate with a Self Directed IRA..please read on..

Purchasing land with your Self Directed IRA:

While doing some research, you find a 1-acre lakeview lot for sale for $100,000 in a booming part of North Carolina. In five years, you are certain that the lot will be worth much more than $100,000, and so you decide to purchase the lot.

You look over your finances to see what's available. You currently have $150,000 in your retirement account.

Here's a few ways to structure this transaction for your benefit:

1) Purchase the Lot in Cash with your IRA – With $150,000 in your retirement account, the lot could be purchased in full on the day of the closing. Purchasing the lot in this way would mean that there would be no mortgage payments and no debt associated with the lot, and all profits made from the eventual sale of the lot from the real estate

would go directly into your IRA account tax-free or tax-deferred, depending on your plan. It's just that simple. And remember that any expenses pertaining to the property, such as construction work or tax bills, will be paid out of your IRA; leave some cash in your IRA account so the expenses are covered.

2) Partner with Your IRA - A great way to use leverage with your IRA is to partner with yourself; specifically, you can use mortgage loans and IRA money to make a purchase. In the example, the $100,000 lot can be purchased using both your IRA and a mortgage loan. You could use your IRA to put down $30,000 (30%) at closing, and then you, as an individual, acquire a mortgage loan from a bank for the remaining $70,000 (70%). In this type of transaction, partnering with your IRA allows you to put a cash sum down without involving any personal money. When partnering with your IRA, the split of ownership must directly reflect how much each contributes to the purchase price. With the above example (the 70-30% split), the IRA cash is for 30%, and you as an individual contribute 70% via the loan. Of course, this example is just one way in which the split can occur. Any percentage split is permissible so long as it reflects the contribution amounts from each party and equals 100%.

Keep in mind that the IRA is not responsible for any loan costs or loan payments. Once the lot is sold, the profits from the sale must also reflect the same percentage split.

The paperwork associated with this transaction is also easy & painless. Essentially, you would complete an Entrust Carolinas LLC application, a fee disclosure & a copy of your driver's license, and that would create your self-directed IRA. From there, a simple transfer form would move your retirement account from the previous custodian to Entrust Carolinas, LLC (which is a non-taxable event) and along with the Buy Direction Letter and standard closing documents of any real estate transaction, the lakeview lot would be yours.

How would the property be titled? As an example, if the buyer's names are Bill and Melinda Gates, the contract and deed are made out to Entrust Carolinas, LLC FBO Bill and Melinda Smith. The FBO stands for "For Benefit Of". The folks at Entrust would actually sign the contract, paperwork, HUD, everything (think of Entrust as a "Power of Attorney" for Bill and Melinda Smith).

How much does this cost to setup? Entrust fees are: One time cost to setup is $50, and cost is $250 per property per year. Very minimal cost. If you own multiple properties, cost per year can be less.

These examples above are for illustration purposes only, and are not to be considered legal or tax advice.

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