purchasing investment real estate inside an ira

Purchasing Investment Real Estate Inside of an IRA

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Drew Bowlds, Regional ManagerClearView Wealth Management, LLC

drewbowlds@cvwm.com425-295-0814

ClearView Wealth Management, LLC

Investing With Clarity & Vision

Member of The ClearView Group, Inc. Serving our Clients since 1986

371 NE Gilman Blvd, Suite 310

Issaquah, WA 98027

Phone: 425.557.0559Toll Free: 866.557.1031

Fax: 425.557.0546

www.cvwm.com

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Securities and Advisory ServicesOffered through

Centaurus Financial, Inc.We Invest In Your Success

2300 East Katella Avenue, Suite 200Anaheim, CA 92806

Phone: 800.880.4234Fax: 714.456.1797

www.centaurusfinancial.comMember FINRA and SIPC

Centaurus Financial, Inc. and ClearView WealthManagement are not offering specific investment, tax or legal advice in this educational workshop. This material does not constitute, and is not intended to constitute, an offering of securities.

Securities and Advisory Services offered through Centaurus Financial, Inc., Member FINRA/SIPC, a Registered Investment Advisor. ClearView Wealth Management and Centaurus Financial, Inc. are not affiliated

Disclosure

Seven things you MUST know about investing in Real Estate in your IRA

Options for holding title to the property

Financing considerations Tax considerations Other options for Real Estate

exposure in your IRA

The Ground to Cover

Course Goals

Upon completing this course you will be prepared to:

Explain to prospects/clients how to invest in Real Estate through a self-directed IRA

Know how to properly write a P&S agreement to purchase Real Estate inside an IRA

Use alternate methods (LLC) to purchase Real Estate in an IRA

Seven Things You Must Know

1. Your IRA cannot purchase property owned by you or a disqualified person

One of the most common questions about real estate IRA is: “Can my IRA purchase a property that I currently own?” The answer is always no.

IRS regulations don't allow transactions that are considered "self-dealing," and they don't allow your self-directed IRA to buy property from or sell property to any disqualified person, including yourself.

Seven Things

You Must Know

2. You Cannot Have “Indirect Benefits” from Property Owned by Your Self-Directed IRA

Can your self-directed IRA purchase a vacation home for you to occasionally use? Can you rent office space for yourself in a building that your self-directed IRA owns?

Seven Things You Must Know

No.

The purpose of the IRA is to provide for your retirement at some future date. It's not intended to benefit you (or any other disqualified person) today. If your IRA engages in a transaction that, in some way, benefits you or a disqualified person, this is considered an "indirect benefit".

Seven Things You Must Know

3. IRA Investments Are Uniquely TitledYou and your IRA are two separate entities. As such the investment needs to be titled in the name of your IRA—not to you personally. All documents related to the investment must be titled correctly to avoid delays.

The correct title for most real estate IRA investments is:

"Equity Trust Company Custodian [for benefit of] (FBO) [Your Name] IRA"

Seven Things You Must Know

4. Real Estate in an IRA Can be Purchased without 100% Funding from Your IRA

You can purchase property in more ways than just an outright purchase of the full amount from your account. These other options include using undivided interest and partnering with others. You can also finance an investment with your IRA, but it must be structured properly.

Seven Things You Must Know

5. IRA Investments that Use Financing Must Pay UBIT

Your self-directed IRA can purchase real estate using financing as long as the loan is non- recourse. If you do use financing, unrelated business income tax (UBIT) applies.

Seven Things You Must Know

6. Real Estate IRA Income Must Return to Your IRA

All expenses related to property owned by your self-directed IRA (maintenance, improvements, property taxes, condo association fees, general bills, etc.) must be paid from your IRA.

Seven Things You Must Know

7. Real Estate IRA Income Must Return to Your IRA

All income generated by property owned by your self-directed IRA must be paid into your IRA.

The information presented above is for educational purposes only and should not be construed as tax, legal, or investment advice. Whenever making an investment decision, please consult with legal, tax, and accounting professionals.

Scenario #1 Bob Smith is purchasing a house at 4217 Plymouth Street and is offering $400,000 (all cash offer) with $10,000 earnest money. Bob’s IRA is with XYZ Trust Company

Draft a purchase and sale agreement

Scenario #2 Bob has formed an LLC ( “Bob’s IRA LLC”) and has transferred the ownership units into his IRA in exchange for $425,000 in cash in a checking account owned by the LLC.

How would this P&S be different?

Scenario #3 Bob wants to draft an offer to purchase the property under his name “Bob Smith and/or assigns” and he might decide to purchase through his IRA prior to close.

Prohibited (Self-Dealing)

Scenario #4 Same offer Bob wants to use his LLC and offer $425,000 but put 50% down and finance the rest.

How should the offer read?Should a financing contingency be used?Will a standard NWMLS form suffice?

Key Points for Agents

P&S must be titled “XYZ Trust Company FBO “Clients Name IRA”

Buyer cannot assign a P&S contract to their IRA that is considered “self-dealing”

If IRA owner is using financing it must be non-recourse and the owner’s credit cannot be used to underwrite the loan

Other Prohibited Transactions

The IRA owner “Realtor Bob” cannot purchase property for his IRA from a “disqualified person” or from himself.

(for a definition of disqualified person see IRC 4946)

Things to Watch Out For

Property must be titled correctly

Custodian must sign all documents including the P&S and closing documents. Bob directs this through a buy/sell direction letter

All monies must come from/go to the IRA this includes earnest money, purchase dollars, repairs/maintenance, etc.

FinancingIf the property is financed:

Loan must be Non-Recourse.

Bob does not apply for credit based on his creditworthiness; the lender must be lending on the property as sole collateral.

Seller financing is okay, just not personal guarantee.

Tax Consider-ations

IRAs have inherent tax benefits

Traditional IRA: Taxes are deferred until distributions are made, i.e. until money is taken out of the account

ROTH IRA contributions are after tax and therefore qualifying distributions are not subject to tax

Tax Considera-tions

Buying Real Estate in an IRA is not always the best way to go.

You cannot take advantage of depreciation

Somewhat cumbersome process

Non-recourse financing on single-family homes can be difficult to find and nearly impossible for higher LTV’s

Custodial fees are not inexpensive

Tax Considera-tions

Income may be subject to UBIT “Unrelated Business Income Tax”

Tax on unrelated business income which comes from an activity engaged in by a tax exempt organization that is not related to the purpose of that organization.

UBIT is assessed only on the debt financed portion.

AlternativesOther ways to gain exposure to investment Real Estate in your IRA

REITs – traded and non-tradedInterval FundsReal Estate FundsLimited PartnershipsOther

Next Step

Investing with Clarity & Vision

Thank you for attending our seminar!

G. Drew Bowlds

425.557.0559

866.557.1031www.wealthflex.com