Investing Your IRA Wealth

Investing your IRA Wealth in Real Estate Investment Properties

 This is intended as a brief overview. Please speak to your accountant before making any decisions related to using your IRA to invest in real estate.  Available to anyone with an IRA, Roth IRA Education IRA, Keogh, Simple or SEP.  Must have a self-directed account set up with an administrator  You can move a portion of your money out of an existing IRA into a self-directed account leaving the balance where it was without penalty  The federal rules that most directly apply to this type of investment are in Title 26, Sections 408A and 4975 of the Internal Revenue Code  The IRA cannot transact business with you, your spouse, your parents, your kids, or your kid’s spouses. The IRA cannot invest in a corporation if 50% or more of that corporation is owned by you or your IRA.  If there will be or is currently a loan on a property that you are buying with IRA funds then it must be a non-recourse loan. The IRA cannot be used as security for the loan. Most commercial mortgages are non- recourse that is secured only by the property.  Section 511 of the Internal Revenue Code says that if your IRA purchased property is mortgaged you must pay annual taxes on any income produced. This tax is known as the Unrelated Business Income Tax (UBIT). The first $1000 is not taxed. The amount thereafter subject to the UBIT tax is determined by the relationship of the average amount of debt on the property during the preceding twelve months to the property’s average tax basis, that is purchase price, increased by improvements or decreased by depreciation. Example, $1,000,000 value, $750,000 mortgage, $20,000 in income. 75% x $19,000 = $14,250 x your tax rate ( i.e. 35%) = $4,988 tax due  There are three parts to a prohibited, and all three elements must be in place to make the transaction prohibited. First, the transaction must take place as part of your IRA. Second, the transaction must involve a disqualified person and third, there must be a transaction between a disqualified person and the plan. Without the presence of all three you do not have a prohibited transaction. With the use of an LLC the transaction is between your IRA and the LLC rather than between you and a disqualified person and therefore not prohibited. More information is available from the following sources:  IRA Wealth: Revolutionary IRA Strategies for Real Estate Investment by Patrick Rice  Internal Revenue Service: www.irs.gov/formspubs/index  IRA Resource Associates (IRA Custodian owned by Patrick Rice): www.iraresource.com  Office of Law Revision Counsel: http://uscode.house.gov/usc.htm  Self directed IRA administrators such as Equity Trust www.trustetc.com and others