CUSTODY SERVICES Real Investing in Self-Directed IRAs

Frequently Asked Questions

The following Questions and Answers reflect the applicable rules concerning investing in self-directed IRAs and prohibited transactions. This information is not presented as tax advice, but rather as examples of the types of issues (and opportunities) which can arise when investing in non-publicly traded alternative such as real estate. Any specific IRA may raise issues which should be discussed with your tax or legal professional.

Is it possible to purchase real step-by-step information need to • The account owner estate using funds from my establish and fund a self-directed retirement • A person providing services to the plan (an account and complete the transaction IRA is considered a plan) individual retirement account process with the assistance of their custodian. • An employer, any of whose employees (IRA)? are covered by the plan According to Section 408 of the Internal Can I use IRA funds to pay off • An employee organization, any of whose Revenue Code, the only listed assets not my personal mortgage? members are covered by the plan (such as permitted in an IRA are life insurance, certain a trade association) No, there are a number of prohibited collectibles and certain coins. transactions that must be avoided and they For years, many knowledgeable investors are described in detail in the Internal Revenue have chosen to add real estate to their Code (Sec. 4975). In summary, a prohibited transaction is any improper use of an IRA by retirement investing strategies as a way to the account owner, its beneficiaries or any further diversify their retirement portfolios in order to help grow retirement wealth or turn disqualified person. Examples of prohibited wealth into income during retirement. transactions include:

Millennium Trust has the knowledge and • Selling real estate to it or using retirement expertise to provide account custody to account assets as security for a loan self-directed investors who decide to invest a • Buying real estate for personal or certain portion of their IRA funds in real estate and family use other non-publicly traded alternative assets. • Providing “sweat equity” in connection with the renovation of real estate held in The real estate debit

How does an IRA make a real the retirement account card is loaded with funds estate investment? Can I use IRA funds to buy a from your IRA and then A custodian who specializes in the custody condo in Florida and have my and administration of real estate and other can be used to pay for non-publicly traded alternative assets can mother and father live in it? expenses related to the assist. When an decides to truly No, you cannot use IRA funds to purchase IRA , such as self-direct his or her retirement investing they real estate that would be used by any are totally responsible for selecting the disqualified person. miscellaneous repairs or investment and performing the necessary due maintenance expenses. diligence. The custodian handles the The term “disqualified person” is defined in Sec. 4975(e)(2) for you to review in transaction at the direction of the account Contact owner and custodies and administers the real complete detail. We have summarized [email protected] estate . Millennium Trust’s Real Estate what a disqualified person includes: or call 877.538.5729 to learn more

and set up a real estate debit card for Investment Process Timeline and Real Estate Investment Checklist provide comprehensive your IRA.

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• A direct or indirect owner with 50% or site mtrustcompany.com, by requesting 4. Have your attorney review any transaction- more voting power a one-on-one educational session, related documents such as purchase and • Direct member of the account owner’s or by sending an email to sale agreements or HOA by-laws. family (which includes parents, spouse, [email protected]. 5. Determine how the investment will be children & their spouse, grandparents, and made: direct, with other Millennium grandchildren) How will Millennium Trust investors, through an entity such as an LLC • A corporation, partnership or trust with update the value of my real or leveraged with a non-recourse loan. 50% or more voting power 6. Depending on the investment structure, you • An officer, director, a 10% or more share estate investment? may want to speak with your tax holder or partner A retirement account owner will be required professional regarding any potential to provide Millennium Trust with a Unrelated Business Income Tax (UBIT) Can Millennium Trust give me Comparative Analysis (“CMA”) issues on either Unrelated Business more detailed information on showing the current value of the property. The Taxable Income (UBTI) or Unrelated Financed Income (UDFI). the rules and regulations valuation must be determined by a qualified 7. Spend time becoming familiar with surrounding self-directed independent third party and not the Millennium Trust account owner. A CMA can Millennium Trust’s requirements. investing in alternative assets be performed by a local Real Estate Broker 8. Allow enough time to establish and fund such as real estate? and is due by January 20th each year. In your self-directed retirement account. This process usually takes 2 to 4 weeks to As a directed custodian Millennium Trust does certain circumstances a formal appraisal by complete. not give tax, legal or investment advice and a certified appraiser may be required and strongly encourages investors who wish to must be paid for out of your Millennium Trust 9. The process of identifying a suitable investment property should start once your self-direct their retirement accounts to seek the account. Refer to the Real Estate Valuation account is established and funded, as the advice of knowledgeable professionals who form for specific details. escrow funds/down payment must come can help in the following ways: I’m ready to get started. How from the IRA. • A financial advisor for investment and asset allocation strategies do I go about investing in real How do I make the offer to • A realtor for investment property estate using funds from my IRA? purchase real estate if my IRA is identification Millennium Trust’s Real Estate Investment making the investment? • An attorney for contractual issues Process Timeline and Real Estate Investment To avoid prohibited transactions and their tax • A CPA for tax, accounting and reporting Checklist provide detailed information on the consequences remember the following requirements entire real estate investing process but here important points. • A to manage income are some important points to consider. producing • You cannot assign a 1. Understand the total cost of real estate from yourself to your IRA so before making • A lender who offers non-recourse loans to ownership, as any expense related to the an offer, make sure your self-directed IRA IRAs for the purpose of leveraging an IRA account is open and funded. real estate investment investment must come from your retirement funds. Do the math first. • Any expense related to the investment must What if my accountant, come from the retirement account 2. Consider discussing your investment including escrow/deposit funds. You attorney or financial advisor objectives with your financial advisor to cannot use personal funds. uncover any potential issues by performing has questions regarding • The offer to purchase real estate should be some ‘what if’ scenarios. investing in real estate in my made in the name of Millennium Trust for 3. Find a real estate professional that the benefit of your IRA. retirement account? specializes in investment properties as they • Please refer to the Real Estate The financial, legal and tax professionals you usually have the knowledge and expertise Investment Checklist for specific work with can learn more about self-directed to thoroughly analyze the target investment. registration instructions. investing in several ways: by visiting our web

® Real Estate Investing in Self-Directed IRAs

• All rental income due the IRA must be Can I use my IRA to buy a Yes, you can use IRA funds to invest in an submitted to Millennium Trust with a income producing building. When Rental Payment Coupon form. For co-op in New York City? the IRA directly owns the income producing check issuance instructions, please refer Yes, but by the nature of a cooperative your real estate, rent checks would be made out to to our Delivery Instructions. IRA would be investing in an entity. The the IRA custodian. ownership in the entity would entitle the IRA I don’t have enough money in to a unit within the co-op. The ownership in The IRA account owner can consider hiring a my IRA to buy a property the cooperative should be for investment property manager to manage the real estate, purposes and not personal use. including collecting rent and handling outright. Can I use my IRA maintenance issues. funds as a down payment and Is it possible to use IRA funds to If you opt to manage the real estate yourself, get a mortgage for the rest? buy a foreclosed property? the Millennium Trust Real Estate Debit Card is You cannot personally guarantee a loan on Yes, but you must be aware of the a great option as it makes it easier to pay behalf of your IRA; but it is possible that your purchase process including payment expenses associated with an investment IRA could obtain a non-recourse loan if the timeframe which is usually very short. If property held in your self-directed IRA. non-recourse lender’s current criteria are met. planning to use IRA funds for the foreclosure You, or any other disqualified person, cannot However, debt-financing an IRA funded real process, it may be necessary to identify an estate investment could trigger Unrelated live in, use or perform any work on the escrow agent to hold funds until the day of apartment building. Also consider consulting Business Income Tax (UBIT) based on purchase. Working with a knowledgeable Unrelated Debt Financed Income (UDFI). with an attorney to discuss liability issues and real estate attorney or CPA would be options for creating some level of liability Seek out a CPA to review IRS Publication beneficial in this scenario. 598 providing details on UBIT, UDFI and protection around you and your IRA’s reporting requirements. Leveraging an IRA investment. investment may require the IRA to pay UBIT; Is it prohibited for me to use therefore, it is important to do the analysis up some of my IRA funds to lend If I use IRA funds to buy a front to determine if the proposed investment money to my brother for a real condo, can I use my personal scenario makes financial sense. There are a estate development project he’s funds to purchase the golf few lenders who offer non-recourse loans to IRAs and an Internet search on ‘non-recourse working on? membership that is available to lending’ should provide a list of those Sec. 4975 does not list siblings as condo owners? I know I can’t financial institutions. disqualified persons therefore you may be use the condo, but I do want to able to use IRA funds to invest in your be able to use the golf course I want to use my IRA funds to brother’s project. It is wise to consult with a tax or legal and the only way to obtain a buy a medical complex and professional to discuss your specific intentions golf membership is through rent out space to fellow prior to directing this type of investment. condo ownership. physicians and therapists. You cannot use personal funds to purchase a Is it legal for me to do so? Can I use my IRA to buy an golf membership that is available because Yes, providing you do not rent any of the apartment building? Who your IRA owns a unit in the golf community. space out to yourself, or any other collects the rent checks and This could be considered ‘enabling’, meaning disqualified person, which would be how do I pay for ongoing the IRA investment is enabling the IRA account owner to purchase the golf membership. considered a prohibited transaction. maintenance and repairs of the building?

® Real Estate Investing in Self-Directed IRAs

I want to buy properties that the purpose of growing IRA wealth. Unlike distribution in kind. A partial distribution can the tax laws that revolve around vacation only be taken in certain instances and should need repairs and I want to do property, Sec. 4975 states that the IRA be discussed with a tax advisor or attorney. the work myself. I’m an cannot personally use or benefit from the The type of IRA (traditional or Roth), length of electrician and I’m capable of IRA-owned investment. time the asset is held, age and current tax doing all of the electrical work bracket of the IRA owner must be factored on the properties. Is this okay? What happens when I need to into the equation to determine what, if any, take mandatory distributions taxes will be due on the distribution. A If my IRA owns a property and discussion with your tax professional will help it needs minor work, say from my IRA and my only asset you better understand the options and replacing a broken glass is real estate? implications of taking an IRA-owned property window, can’t I do that myself? The account owner may fill their Required as a distribution in kind. Mandatory Distribution (RMD) by I’ve heard from industry experts withdrawing assets from another qualified How do I find knowledgeable that I can do that small amount retirement account. If this is not an option the tax, legal, investment or real of work. account owner can sell the real estate asset estate professionals? in order to have cash available for the Performing any work on an IRA real estate Local organizations such as your state CPA asset would be considered a prohibited mandatory distribution or take an in-kind distribution of the property (refer to the society, realtor board, bar association or transaction according to Sec. 4975 which financial planning association are a good states that any direct or indirect furnishing of paragraph below). You should contact your CPA to discuss how you will handle required place to start. It is prudent to select your goods, services, or facilities between a plan professional partners based on credentials, (IRA) and any disqualified person (including minimum distributions well before the required timeframe. IRS Publication 590 states that experience and knowledge. Are they the IRA owner) is considered a prohibited regulated? What type and how much transaction. Industry experts may have their you must start receiving distributions from your IRA by April 1 of the year following the year insurance coverage do they have? What is own interpretation of the Internal Revenue their core business practice? Have any Code but may not be able to defend you in which you reach age 70½. Roth IRAs, however, do not have a mandatory sanctions been filed against them? Are they and their position in tax court if and when a up front in answering questions about prohibited transaction is detected. distribution requirement while the account owner is living. administration fees and how and where your assets are held in custody? If you have trusted If I buy a vacation property Can I take ownership of my professionals who are not yet knowledgeable using my IRA, is it considered a about self-directed IRA , share this IRA-owned property when I’m second home and can I use it document with them or have them contact ready to retire? If yes, how do I Millennium Trust to discuss specific questions two weeks out of the year do that and are there any tax in detail. without causing any problems implications? with the IRS? The only way an IRA account owner can use When considering a real estate investment or take ownership of an IRA-owned property within an IRA, the account owner should view is by taking a distribution in kind of the real the real estate as just that – an investment for estate. This can be done by taking a 100%

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