Entrust Learning Center > Keyword: self directed ira > Real Estate Investing With Your IRA

Real Estate Investing With Your IRA

The Process and Procedures That Make For a Pleasant Experience

By: Lamarr Baxter, Business Development Manager

IRA & 401(k) Insights

As many investment experts and professionals have conveyed for several years, real estate is considered one of the most popular and lucrative investments. It is known to be one of the greatest hedges against inflation along with it being a tangible asset that has never devalued to “zero”. Like any investment, it’s not for everyone, especially if you do not possess the knowledge, expertise and/or have a team in place that can guide you through the process.  Part of the process is performing proper due diligence on the investment procedure as well as the subject property. It’s important to consult with your tax and legal professionals before proceeding with your investment. This is especially true when it comes to investing in real estate using a self-directed retirement account.  In addition to performing the list of tasks just covered, it’s also important to understand the process and procedures relative to Internal Revenue Code (“IRC”) Section 4975 to avoid committing a Prohibited Transaction, which could result in the disqualification of your retirement account - and could include the assessment of taxes and penalties.  

The main objective here is to ensure that your experience investing in real estate with a self-directed retirement account is both pleasant and lucrative for you.

The Importance of Establishing and Funding Your Account Prior to Entering Into Contract

There are a few rules to consider when investing in real estate with a self-directed IRA in accordance to IRC 4975. The first rule would be NOT to enter into contract under your name as the accountholder and/or any other disqualified person assuming you can transfer the contract via an addendum. In the normal course of business for a real estate transaction, this would be acceptable, but not with a self-directed IRA.  As a Third Party Administrator, one of Entrust’s responsibilities is to not knowingly permit a prohibited transaction from occurring.   If during the transaction review we identify that the accountholder has personally entered into contract under their name, we must reject the transaction. To remedy the problem, an entirely new contract must be generated reflecting the IRA as the buyer of the property. Depending on the selling agent and how far along in the escrow process you are, it may not be possible to resolve, thus resulting in the cancelling of the contract and possible loss of your escrow deposit.  If your intention is for your IRA to purchase the property outright, it is also important to remember that all funds to acquire the property must come from the self-directed IRA, including the escrow deposit. There can be no co-mingling of personal and retirement funds in the transaction unless you are using personal funds to partner with your IRA to purchase the property. Even then, you are limited to contributing personal funds up to the percentage of ownership held by your IRA; in other words, you cannot invest more personal funds than you are investing through your IRA.

The Importance of Performing Your Due Diligence

An Entrust motto for the self-directed IRA is “Invest in What You Know and Understand”. Part of the message here is that it is very important that you are educated in the specific investment vehicle you are pursuing and/or assemble a team of professionals to assist you throughout the process. One of the responsibilities of the IRA accountholder is to perform the necessary due diligence to aid in making the best and most sound investment decision possible. Part of that due diligence would include making sure you carefully screen and interview the real estate professionals you choose to represent your IRA in the purchase. It is essential that your real estate broker/agent and his/her team possess the necessary experience in processing such a transaction. A best practice is to ask for references of past clients whom the agent/broker represented in purchasing properties using a self-directed IRA.  Contact these parties to verify that the agent was proficient in this process before moving forward. Performing the proper diligence on this type of transaction will be one of the determiners as to whether your real estate investing experience will be pleasant versus unpleasant.

Buying Via an Auction vs. The Traditional Method

There are advantages and disadvantages of buying property via an auction with a self-directed IRA versus traditional methods (i.e. bank, private party, etc). One of the primary challenges of purchasing real estate via auction using a self-directed IRA is the very short and stringent timelines relative to those of an IRA custodian/administrator. These time constraints can often result in the processing of paperwork and disbursing of funds not being completed in a timely manner.  Therefore, it’s important that you understand the ramifications of each method and to ensure you and/or your team is properly prepared for the transaction. If you anticipate making a high number of property acquisitions via auction, consider establishing an entity such as an LLC or Corporation owned by your IRA. Such a structure will grant you “checkbook control”, enabling you to have more control of the transactions process and to meet the stringent timelines of the auction buying process.

Understanding the Real Estate Buying Process

In order to ensure a positive experience in investing in real estate using a self-directed IRA, it’s important that you understand the buying process and acknowledge the timelines throughout the process. It would be highly recommended that you do not enter into contract until your self-directed IRA is both established and funded.

Below are the steps involved in establishing and funding your account and investment: 

Step #1 – Establish Your Account - Establishing your account consists of contacting your local Entrust office to complete an application packet which includes the necessary forms to fund your account. This process takes approximately 1-2 business days.

Step # 2 – Fund Your Account – Funding your account is very important both to purchase the property and because all expenses associated with the property must derive from the IRA account, including the escrow deposit. You are not allowed to use personal funds to pay expenses for acquiring an asset with your IRA. Some sellers/selling agents require proof of funding as part of the purchase offer packet, so it may be necessary to provide proof that your IRA has adequate funds to purchase the property by providing them a copy of your recent Entrust account statement. Not being able to show adequate funds could result in your offer not being accepted, or it being rejected at a later stage of the escrow process. Another consideration is that when you are requesting a transfer or rollover of funds from your current custodian, it can take up to four weeks for the funds to reach Entrust. Therefore, we encourage clients investing in real estate to fund their account as early in the process as possible. Once your account has been established and funded, and you begin seeking out property to invest in, there are additional timelines and checklists to be aware of for the acquisition process:

• Entrust requires 5 business days to review closing documents and complete the transaction
• To expedite the reviewing process, a special $150/hour handling fee applies. Entrust cannot guarantee same-day funding of the transaction
• Double check to ensure your investment documents are properly vested in the name of the IRA or qualified plan to prevent any delays in processing and/or funding
• Prior to funding, Entrust must receive all closing documents signed by all parties for recordkeeping and IRS audit purposes
• All income and expenses for assets (or portion of ownership interest) held in a retirement account are required to flow into and out of the retirement account to maintain its tax‐free or tax‐deferred status
• Entrust’s wire transfer cut‐off time is at 10 a.m. Pacific Time

Real estate is the leading asset class relative to investments made using a self-directed IRA. It can be a very safe and stable form of investment to grow your retirement account. However, if the proper steps, rules and due diligence are not followed, it could lead to an unpleasant investment experience, as well as IRS consequences.  Therefore, be prepared to educate yourself and assemble the right professionals to assist you along the way.

If you have any additional questions regarding investing in real estate using a self-directed IRA, contact your local Entrust office or listen to one of our on-demand webinars.

By Lamarr Baxter, Business Development Manager
lbaxter@theentrustgroup.com

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