Estimated reading time: 3 minutes 10 minutes
For our August national webinar, we discussed the top Real Estate IRA investment trends. Most of the information presented was collected from client data and watching real estate trends. If you missed the webinar, click here to watch the recorded video. During our webinars, we hold a quick Q&A at the end of each session to answers the burning questions from investors of all types. Continue reading to see what questions investors had regarding Real Estate IRAs:
Q: Is an LLC that you own (or partially own) considered a non-disqualified 3rd party?
A: Initial funding of an LLC that has no ownership from the IRA has no issues. Once the LLC is owned at least 50% by the IRA, it becomes a disqualified party.
Q: Does a funded account gain interest until it is used for a real estate purchase?
A: It depends on where you invest the cash held under the LLC. The LLC should open an account at a financial institution such as a checking account or other types of account. It will depend on the account opened.
Q: Can you describe the difference in managing a rental or flip it when the IRA owns an LLC rather than just keeping the money in an IRA?
A: To start, an IRA does not have to invest in an LLC to invest in real estate. The IRA can own a piece of real estate out right. LLCs are a tool some investors use with direction by their legal or tax advisor when investing in real estate only as an option. Some of the benefits include liability protection as well as savings on record keeping fees since the LLC is considered as one investment for fees purposes even if it purchases multiple properties. LLC’s may be subject to Unrelated Business Taxable Income (UBTI) if it engages in a trade or business such as real estate development. However, there are certain incomes an IRA may receive that is not subject to UBIT such as rents or gains from the sale of a property as long as it is not considered a trade or business.
Q: Can you purchase a fixer upper for profit with your self-directed IRA?
A: Yes. The gains on the sale will not be taxed until distributed. If the property was purchased using a non-recourse loan, there may be taxation on the income attributable to the portion borrowed.
Q: What is required to report to the IRS on a yearly basis, for a real estate purchase with my IRA?
A: None unless there is UBIT or UDFI.
Q: What happens if you are investing in Real Estate IRAs and reach 70 1/2 and required to start making withdrawals from your IRA? Do you need to sell the property or are you forced to sell the property?
A: You are not forced to sell the property. Here are some options 1) Satisfy the RMD from another IRA 2) Distribute from cash under the IRA from income from the property if there are liquid assets 3) Rerecord a portion of the property to yourself as a distribution (not recommended) 4) Do not distribute the RMD and just pay the 50% penalty on the RMD amount.
Q: If I own a property and then transfer my property to an IRA, but my cousin currently lives in the property, would they have to move?
A: Exchanging or transferring your personal property to an IRA is not allowed. Assets may only be purchased using assets already in an IRA. There are limitations on how much can be contributed to an IRA as well as only cash can be contributed to an IRA.
Q: Can my fiancé(e) be my IRA LLC's real estate agent for purchase/sale? Can she still perform that role after marriage?
A: A fiancé(e) is not considered a disqualified person until the fiancé(e) becomes a spouse.
Q: If I want to purchase real estate now from a contribution I made by Oct 1 last year. Can I put the money in while I am still looking for a real estate property, or do i have to purchase the real estate at the time I start the IRA?
A: The timing of when contributions are made and when you invest the contribution made are two separate events. It does not have to happen simultaneously.
We encourage our readers to post any additional questions regarding Real Estate IRAs in the comments section below so other readers may benefit from the answers. Our annual Real Estate Investor Market Research report is another example of Entrust’s commitment to educate clients and the professional community, empowering them to control their own retirement saving choices. It is just one of the many resources available on our Learning Center, your source for reliable, objective information on retirement investments. Please click on the image below to get your free report!