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Top 3 Real Estate Mistakes IRA Investors Make

Top 3 Real Estate Mistakes IRA Investors Make

top 3 real estate mistakes IRA investors makeWhen IRA investors approach the purchase of a real estate investment, they are typically surrounded by many time sensitive requirements and urgent tasks. With so many distractions, mistakes can be made that cause problems for the IRA holder. We’ve put together the top three mistakes that IRA real estate investors make and what you can do to avoid making the same mistakes.

1) Incorrectly Vesting the Title

When completing the purchase contract, make sure that ownership is titled under the name of the IRA. The title should be listed in the following way: “Name of the custodian, trustee, or administrator, for the benefit of (FBO), your name (IRA holder) and account number.” Never place the purchase contract in your own name. If you’ve made the mistake of putting the contract in your personal name, you should try to obtain a new contract right away with the proper vesting before making an earnest money deposit.

Here is an example of how the property title should read, “The Entrust Group, Inc., FBO John Doe, Traditional IRA 12345.”

If you partner your funds (for instance with another individual, company or with other IRA funds) then each entity must be on the title with their respective percentage of ownership.

Here’s an example of the titling of a property purchased by multiple parties: “The Entrust Group FBO John Doe, IRA 12345 as to 50% interest and Jane Smith as to 50% interest.”

2) Making an Incorrect Earnest Money Deposit

The earnest money to purchase a piece of property must always come from the IRA. The reasoning behind this is that the IRA is the one purchasing the property and not the IRA holder personally. Making an earnest money deposit from your personal checking account instead of the IRA could therefore jeopardize the transaction. You may fall into the hassle of needing to retract the earnest money deposit and then having to resubmit it using money that comes from the IRA account. This could be an issue if escrow has already opened. The title company may then need to open a new escrow in order to reimburse the initial earnest money deposit back to you. To avoid this costly mistake, you always want to make sure the earnest money deposit comes directly from your IRA account.

3) Ignoring the Self-Benefit Rule

As your IRA investments are receiving favorable tax treatment, namely tax-deferment on the growth of the investment, any benefit you receive from the investment while it’s under the IRA will jeopardize the qualified status of your IRA. In this case, if a transaction were to take place where the IRA holder was benefiting personally then this would be considered a prohibited transaction.

Below are a few prohibited transactions that you should be aware of and avoid taking part in:

  • Borrowing money from your IRA account.
  • Purchasing property that you or a disqualified person use now or plan on using in the future.
  • Using the property owned by your IRA as a vacation home.
  • Personally remodeling a property owned by your IRA.
  • Using a property owned by your IRA as collateral for a loan.
  • Selling, exchanging, or leasing property to your IRA or from the IRA to yourself.
  • Personally receiving compensation for managing property held by the IRA.
  • Personally receiving real estate commission on a property purchased or sold by the IRA.
  • Transferring the plan income or assets to a disqualified person.
  • Lending IRA money to a disqualified person.
  • Giving an extension of credit from your IRA to a disqualified person.

Avoiding these top three mistakes will make your real estate purchase much smoother when using your IRA. If you would like a free consultation on how to open a self-directed IRA, please have a quick chat with us.  

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