Estimated reading time: 4 minutes
For this month's webinar, we discussed 2017 Real Estate IRA investment trends and insights. Participants had the opportunity to ask Bill Neville, our Business Development Manager, questions regarding Real Estate IRAs and more. Continue reading to see what types of questions were answered:
Q: My accountant always tells me my profit sharing plan can only invest in real estate that is 100% funded. Meaning, I cannot use $200K from my plan as a down payment and then take out debt to fund the remaining capital required to buy an asset. Is this consistent with your understanding? Please provide any other thoughts on funding or structuring real estate investments.
A: Real estate under a profit sharing plan can be purchased using a non-recourse loan. Although using an asset typically generates Unrelated Debt Financed Income tax, profit sharing plans under 401(a) of the code is not subject to it IRC 514. See publication 598.
Q: Would there be any tax benefit to do a 1031 exchange with the investment holdings in a self-directed IRA? Is a Pension & Profit Sharing Plan the same (tax wise) as a self-directed IRA?
A: The only benefit would be is replacing an asset without having to sell it. All the prohibited transaction rules still apply. Typically yes.
Q: Is it possible to use self-directed IRA money to purchase real estate if there are not adequate funds to purchase the property? If so, what is the process?
A: Yes. The IRA may use a non-recourse loan to do so. The IRA holder would need to seek out a non-recourse loan lender willing to lend to the IRA. The IRA would be the borrower. Once the IRA passes the underwriting guidelines of the lender, they will work with the custodian to facilitate the purchase.
Q: Here in Florida, landlords must keep tenant security deposits in a separate 'escrow' account. I don't think I can fulfill that with a custodial IRA - is there a solution?
A: The IRA can open an escrow account under the name of an IRA and accomplish the same as a person.
Q: Is there a way to structure the purchase of a vacation home that can be made with my self-directed retirement plan?
A: A vacation property may be purchased by an IRA however, the IRA and investment will be subject to the prohibited transaction rules. As an example, the IRA holder and certain family members cannot use or even rent the property.
Q: Can my retirement account invest in a franchise business?
A: Yes, however, the IRA holder nor certain family members cannot be involved with running the business. A trade or business owned by an entity like an IRA may also generate Unrelated Business Taxable Income (UBTI).
Q: What if my IRA doesn't have enough funds to cover the full purchase price, and I have to supplement with cash from personal savings. Is this possible? Also, is it true that I cannot use the property if the IRA has purchased it?
A: You may, however, income and expenses must be allocated back to respective ownership percentages of you, the owner, and the IRA. Yes, that would be considered a prohibited transaction.
Q: How does one handle mandatory IRA withdrawals if there is no liquidity due to timing of the investment?
A: If you are referring to Required Minimum Distributions (RMDs), an RMD can be satisfied by taking the distribution from other IRAs or the IRA holder may choose not to distribute the RMD and instead just pay the penalty of 50% to the IRS in lieu of taking a distribution.
Q: Are there investment type (ie: race horses) restrictions using this self-directed IRA?
A: There are two investments noted on the IRC 408(a) that cannot be held under an IRA and those are life insurance contracts and collectibles. There are a list of tangible investment listed under proposed regulations that also cannot be held under an IRA. A third investment, S-corps, cannot be held as an investment under an IRA since a Trust cannot be a shareholder of an S-Corp.
Q: What if you don't have enough in your IRA to buy a house outright? Can you get a loan for the difference?
A: Yes, the IRA and not you can avail of a non-recourse loan for the deficit.
Thank you to all of the curious investors who participated in our webinar. We encourage our readers to post any additional questions regarding self-directed IRAs or Real Estate IRAs in the comments section below so other readers may benefit from the answers. In addition, you can view the full recording of this webinar here to get answers to questions which are not listed in this article.
Attend our next webinar about diversifaction of your retirement portfolio with precious metals. Details here.