With a self-directed IRA or SDIRA, you can diversify your investments to include real estate, businesses, notes, vehicles, and just about anything else that isn’t restricted by the IRA. Essentially, self-directed IRAs allow the investor complete control over investments.

Real estate investments are popular with self-directed IRA investors and there are four ways to do it:

i) Wholesale property: when the contract is in the name of the IRA instead of the name of the investor. The initial investment or initial payment comes from the IRA. After the contract is assigned, the assignment fee goes back to the IRA. When it comes to a Roth IRA, returns are tax-free.
ii) Buy an option on real estate and use or assign it to a third party or cancel it in exchange for a commission.
iii) Purchase a property by financing it with the IRA or through a non-recourse loan from a lender. The returns on this debt-financed investment in your IRA can attract Unrelated Business Income Tax (UBIT).
iv) You may associate your IRA with another IRA or non-IRA investors.

Self-Directed IRA: A Profitable Long-Term Investment Tool

There are several advantages to using self-directed IRAs to invest in building real estate. For example, Jack uses $25,000 from his self-directed IRA to purchase an old foreclosed property. He spends $25,000 to $35,000 again from the retirement account for property repairs and renovations. After this, he rents it out for around $1000 a month, which will go into his IRA. This rent money will generate tax-deferred money. So when Jack sells the property, the proceeds from the sale go to the IRA without incurring capital gains taxes. Assuming Jack keeps the property for about six to eight years, the price has likely appreciated, which would mean a significant gain for his IRA. If Jack identifies another property that looks set to appreciate faster than the current one, he can sell the property he owns and use the money to invest in the new property. Therefore, the self-directed IRA is a great investment tool for the long-term investor.

Self Directed IRA Real Estate Investing Facts

There are many properties on the market and the self-directed IRA is an immediate source of funds to invest in them. Although the investor can invest in raw land, commercial or residential rental properties, he cannot live in the property. In addition, real estate is a great investment for tax purposes, since the expenses are deductible. However, the sale of the property attracts long-term capital gains of 15%. If this investment is within an IRA, the expenses are not deductible. When it is sold, the gain from the transaction is also taxed when it is withdrawn from the IRA as ordinary income. On the other hand, if the investment property is inside a Roth IRA, the distributions are tax-free as long as the account has been there for at least five years.

Uncle Sam is watching

Real estate investments through a self-directed IRA must strictly follow IRS guidelines to avoid the risk of the account being disqualified and incurring severe tax penalties. These rules do not allow the investor or relative to occupy the property. All expenses including repairs, property taxes, etc. It will be funded by the IRA. The investor has to make sure that there are enough funds available.

The solution, then, is to choose properties in places where rents are good and long-term appreciation is high. The IRA investor can make the real estate investment in cash, or opt for a non-recourse loan. They can also partner with themselves where their IRA contributes 50% and they contribute their personal savings account balance. That said, SDIRAs remain a lucrative investment tool for real estate.