In the past few years,Denver real estatehas proven to be a profitable alternative investment that offers attractive risk-adjusted returns. Unfortunately, quite a few investors who have wealth concentrated in retirement accounts haven't explored this opportunity - due to real estate traditionally being available through taxable amounts.Real estate IRAis opening new doors that you probably haven't considered earlier.
What is Self-Directed IRA?
A Self-Directed IRA is not very different compared to other IRAs. However, it is unique because of the investment options available. A lot of IRA custodians allow only investing in bonds, stocks, mutual funds and CDs, but a self-directed IRA custodian, (such as Equity Trust) allows those types of investments in addition to real estate, notes, private placements, tax lien certificates, etc.
Self-directed retirement accounts are one of the best optionsfor investing in real estate with tax benefits. They are also called Real Estate IRAs because of their ability to invest in real estate and real estate-related assets.
Byusing self-directed IRA, you can invest your tax-advantaged retirement dollars in investments you know and understand. Through the power of compounding interest, it has the potential to create lasting wealth for you.
Benefits of Using Self-Directed IRA Investments in Property
There are three main benefits of using Self-Directed IRA (SDIRA):
-
Increased ROI potential
SDIRA gives you the flexibility to invest in alternative assets. This means that you will have an increased level of flexibility regarding the amount of risk that you want to incur and enjoy the potential for a higher ROI.
-
Protection against economic fluctuations
It is common knowledge that the stock market can be quite volatile which can put your money at risk. Therefore, you need to diversify in order to protect your wealth. By investing in alternative assets like real estate, you can create a healthy level of diversification and capitalize on investment opportunities at the same time.
-
Controlling your financial future
SDIRA puts you in charge of your own financial future. You can make the right financial decisions, fulfill your financial goals and plan for your retirement smartly, with the help of a real estate IRA and a trusted accountant.
Self-Directed IRA Real Estate Investment Rules
There are numerous benefits of using a self-directed IRA to buy real estate. But, the most obvious way to realize these benefits is by following the rules. Some of those self-directed IRA real estate rules include:
Rule 1: You cannot own the property
The IRA is not allowed to purchase property that you or a ˜disqualified person' owns.
Rule 2: You cannot have indirect benefits
You cannot have any indirect benefits from the property that is owned by your self-directed IRA. One of these indirect benefits may include renting the garage apartment in a house that your IRA owns.
Rule 3: Property must be uniquely titled
All the IRA investments are uniquely titled which means that you and your IRA are considered to be two separate entities. The investments should be titled in the name of your IRA.
Rule 4: Property can be purchased with combination funds
The real estate in your SDIRA can be purchased in combination with other funds. You can consider undivided interest and partnerships.
Rule 5: Must pay UBIT, if financing
Any IRA investments that use financing are required to pay Unrelated Business Income Tax (UBIT).
Rule 6: Expenses must be paid from IRA
Expenses related to IRA-owned properties must be paid from the IRA. These expenses may include building association fees, maintenance fees, utility bills, property taxes and renovations.
Rule 7: Income generated must return to IRA
Any income generated through self-directed IRA-owned real estate must be returned to your IRA. In fact, any income generated by the property owned within your SDIRA is required to be paid directly into your IRA.
To summarize, self-directed IRA real estate acts as a good vehicle for the long-term appreciation of the assets you're already comfortable owning. Talk to your financial advisors on how you can take advantage of it.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, aretirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last 10 years has turned his focus to self-directed accounts and alternative investments. Rick regularly posts helpful tips and articles on his blog at SD Retirement as well as Business.com, SAP, MoneyForLunch, Biggerpocket, SocialMediaToday and NuWireInvestor. If you need help and guidance with traditional or alternative investments, email him at rick@sdretirementplans.com.
Socials