Should You Buy Real Estate in Your IRA? Better Get The Facts First!

In this video, I'm going to explain how you can purchase real estate using your individual retirement account. But before you jump into the deep end of the pool, I'm going to provide some education on the benefits and prohibited transactions. By the end of the show, you'll know what it takes and how to get started.

Welcome to another edition of We're Talking Money. I'm Phil Clark, wealth advisor and founder of OmniStar Financial Group. It's a safe bet to assume you have heard that real estate can be a smart investment, and it's true for many. However, the price of admission puts real estate investing out of reach, but your IRA could be your ticket.

Before we get into real estate, don't forget to like, share and subscribe to our channel for more videos on various topics related to personal finance and budgeting, investments and so much more. Our team at OmniStar is committed to empowering individuals and couples just like you. Now let's get into it.

A self-directed IRA allows something that your traditional IRA simply cannot match. It's another way to potentially grow your wealth. Purchasing real estate within your IRA provides tax advantages and potential growth in property value.

Now, before you can make this happen, a self-directed IRA is required. This is what gives you that flexibility to invest in real estate within the retirement tool. You'll want to choose a custodian who specializes in these types of IRAs. Now, I don't have a preference or an allegiance to a custodian, but a few that have gained popularity include pinsco, Entrust and Equity Trust. All three of those, I believe, you can rely on for good service and quality information that is dependable.

Once your self-directed IRA is established, you will need to fund it. Got to have money in there to buy some real estate. Now, to do this, you can roll over funds from your other retirement accounts. Maybe that's an IRA, could be a 401k. You can also fund it by making your annual contributions. Now you're ready to go.

So let's talk about what you can and cannot do in your new self-directed IRA. When it comes to prohibited transactions, the Internal Revenue Service, they have specific rules in place to ensure that your IRA remains compliant. Now, most types of traditional investments are permissible. I speak of things like stocks and bonds, mutual funds or ETFs.

The IRS prohibits IRA assets from being invested into life insurance contracts, and they prohibit investing IRA dollars into any form of collectibles. According to the IRS, that would be artwork, rugs, antiques, gems, stamps and even coins. But keep in mind, gold, silver or platinum coins or bullion, those are permitted. You can own precious metals in your self-directed IRA.

Lastly, an S corporation cannot be owned by an IRA or a self-directed IRA. By the way, this is not because the S Corp is prohibited under the IRA rules. Actually, it's because all S corporation owners must be considered individuals, and a self-directed IRA is not.

Now, most commonly, prohibited transactions generally involve those transactions between your IRA and disqualified individuals or entities. This includes the IRA owner, family members and certain business entities that are controlled by the IRA owner.

Fortunately, the reality is that prohibited transactions with IRAs, they're not all that common. That's a good thing, and it's because the overwhelming majority of IRA assets, they're invested into traditional type securities, publicly traded securities, and those rarely cause a problem. But prohibited transactions in self-directed IRAs can easily happen without the proper guidance.

For example, if someone establishes a self-directed IRA with the goal of, say, investing IRA dollars into a small privately held business that's under their control, maybe they own it, there is a risk that allocating those IRA dollars to own that business, that can cause the IRA to become disqualified. When I say disqualified, it means that that IRA will be viewed as a full distribution, and that could mean a major taxable event.

If a self-directed IRA can invest in business, then why would this be a problem? If the IRA puts money into the business, and that business then uses the money to pay a salary to that IRA owner, the IRA owner has effectively used the assets of the IRA to enrich him or herself.

In the same way, if an IRA owner invests into direct real estate and then does, say, repair work to that real estate, a prohibited transaction has occurred. And that's because the IRA owner rendered services to or for an asset that is now owned by his or her IRA. Think about it this way: payment for those services to the IRA owner, that could be a way to move money out of the IRA without paying taxes.

The IRA needs to hire someone to repair or otherwise provide services to these properties, and the IRA in turn must pay for those services, and that means that the IRA has to use its own money. The IRA owner paying for services on behalf of the IRA would trigger a prohibited transaction. In other words, the IRA owner can't pay for these services. The IRA must pay for the services. Or if the IRA owner does pay for those services, at the very least this would be considered a contribution for that current year. That also assumes that he or she has not already met their limit on contributions for that year.

Now, other common prohibited transaction complications with direct real estate in an IRA include renting the real estate to the IRA owner or other family members. Anyone in the family is considered a disqualified person. Remember, we said all family members are disqualified, and they may not benefit from your IRA. Allowing family to stay for free in the real estate, or hiring family members to work on or in the real estate property, that is also prohibited. Trying to transfer existing real estate that the IRA owner has in their possession, trying to transfer that into the IRA, would also be prohibited. If it is self-dealing, it's probably prohibited.

Navigating these rules, it requires close adherence to the laws. A knowledgeable custodian, a qualified tax professional or wealth advisor can help you avoid the many pitfalls that are around self-directed IRAs. You want someone that understands the rules and ensures that your IRA always remains compliant. The idea here is to keep you out of hot water.

That's what cause prohibited transactions, they bring with them some pretty hefty penalties. The first penalty is a tax of 15 percent on the amount involved in the prohibited transaction, and that's imposed on any disqualified person engaged in the prohibited transaction. And if the prohibited transaction isn't promptly unwound or corrected within the current tax year, the penalty tax is increased to 100 percent of the transaction amount. That is a FD penalty.

Thanks for watching this episode of We're Talking Money. I hope it inspired you to consider the power of real estate investing through your IRA. By understanding the rules around prohibited transactions and working with the right professionals, you can unlock the potential of real estate investing while enjoying the tax benefits offered by your IRA. Don't forget to subscribe to our channel for more valuable insights and information on growing and protecting your wealth. I'll see you next time on We're Talking Money.

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