Real Estate In Your Investment Account

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realeasateHolding Real Estate in your IRA account is not a new concept.  For years, private companies have been able to utilize retirement funds a a source of business capital.  There are rules that must be adhered to and not all custodians allow this type of investment.

Ownership is taken in the name of the custodian FBO (for the benefit of ) the client and all rents and expenses are received or paid by the investment account.  You are not allowed to live on the property and would be treated as a prohibited transaction if the exclusive benefit rule is violated.

Leverage is a very powerful tool when purchasing real estate.  However, there are unique requirements when using a self directed IRA and leverage.  The “prohibited transaction” rules state that you, as a disqualified person, cannot extend credit to an IRA or IRA asset.  This means that if your IRA gets  a loan on a piece of real estate-you can not personally guarantee the loan.  This would be viewed as extending credit.  An IRA must secure what is referred to as a non-recourse loan.  This type of loan is given solely based on the property.  A bank who lends money this way is lending money based on the investment rather than lending to a borrower who has a great credit score.  Because banks do not have any recourse against the IRA or the IRA holder, they typically require a high down payment.  Banks are not in the business of foreclosing on homes, so they need to make sure if your self-directed IRA can not make the payments that it is in a  protected position and will not lose its investment.  Not all banks offer this type of loan so do your homework, and don’t enter into this arrangement without knowing the facts.