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Howdy anyone using their self directed IRA to purchase a property or build one? I have not looked into the details but appears a great way to consider using IRA funds and not just be in the stock market or bond market.
The acronym IRA originally meant Individual Retirement Account but the IRS now considers it to stand for Individual Retirement Arrangement. Self-directed IRA’s allow the account owner to make investment decisions on behalf of their own retirement fund.
The IRS requires that a qualified custodian or trustee hold the assets for the owner. Custodians perform all required recordkeeping and periodic reporting to the IRS. They generally offer standard investment vehicles (stocks, bonds & mutual funds) but may allow other investments within IRS rules.
If your custodian agrees to administer it, you can direct your IRA to invest in real estate but there is a catch. It cannot be used in any way to directly benefit you or you risk the IRS declaring the investment as a distribution of ordinary taxable income along with early withdrawal penalties. For instance, you could buy a vacation home to rent out with the income going to the IRA but you could not take a vacation there yourself. (This is all assuming you are under 59-1/2.)
So in your scenario, a willing custodian could be directed to invest your IRA funds to buy property and build a spec house on it. The sale of the spec house and any profits generated would go back into the IRA. However, it gets a little questionable in my mind as to whether they could be directed by you to hire your company to build the spec house. Further, if you personally benefit by being paid for building the house it could be deemed a prohibited transaction by the IRS.
I would recommend discussing this with your Self-directed IRA custodian to get a determination as to the potential pitfalls and tax implications. Frankly, I think you will have a difficult time getting a custodian to agree to administer this type of scenario.
Deep Creek Builders, Inc.
Check out Guidant Financial. They have an iDirect product, which is a self directed IRA, and an iFinance product, which allows you to use IRA funds to capitalize your business or buy a franchise. Their process helps you make sure your IRA or 401k funds do not accidentally turn into a distribution. There is more flexibility with what you can do in the iFinance product since the IRA/401k money is simply invested in a C Corporation that is created for the purpose and once the money is in the C Corporation bank account the Corporation can do what it wants with it, although the intent is for the Corporation to make a profit. Read the iFinance FAQs to learn more about what can and cannot be done. In practice, you pay Guidant a fee to monitor your transactions to be sure you do not do a prohibited transaction. There are a number of other companies that compete with Guidant in this area.
Some notes: If you already own rental property, there doesn't seem to be any way to 'buy' it from you or a relative using your IRA funds. But you can buy new rental property. And no, you can't have your wife's self directed IRA buy it from you to get around this. The Guidant version claims you can manage the property and even provide maintenance, although supposedly you can't with a standard self directed IRA.
HERS Rater • BPI Building Analyst • BPI Envelope Professional
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One point about using IRA money in a self directed way to buy real estate: all income in an IRA is taxed at ordinary income rates. If most cases, at least on a personal level, you can take advantage of lower capital gain rates when buying and selling real estate. You lose that advantage in an IRA.
I've invested into a C Corp through the intermediary (Equity Trust). It was a bit complicated and the CPA worked it out with the people at Equity Trust. The important thing about the transaction is that Equity Trust has specialists that understand the technical nature of the transaction and they will advise you if you are attempting to do something that will violate the rules.
When you get the entire matter sorted out, its just a simple funds transfer from the Equity Trust account into the Company account.
I do pay a maintenance fee every year. I think it's about $300.