The benefit of holding rental real estate in an IRA is that there are no taxes due as long as the investment has not been distributed to the IRA owner.
How to Purchase Real Estate Using an IRA
All expenses are paid by the IRA, and all income belongs to the IRA. When properties are purchased with cash from an IRA, no taxes are due when rental income is received, or when the property is sold. There is no need to go through the expense and complexity of 1031 tax-deferred exchanges, as the entire IRA is tax-deferred (tax-free within a Roth IRA).
While certain investments held within an IRA may be subject to Unrelated Business Income Tax, rental real estate enjoys a special IRA exclusion, allowing all income to return to the IRA tax-free. UBTI/UDIT is incurred when your IRA owns an operating business or borrows to acquire and asset. Taxation only will occur when a distribution is taken, but a piece of property may never be taxed if it is owned in a Roth IRA.
Types of Real Estate That Can Be Purchased with an IRA
- Single Family Homes
- Apartment Buildings
- Condominiums
- Commercial Property
- Unimproved Land
- Farm, Timber, Mineral-based Property
Using a Self-Directed IRA to Invest in Secured and Unsecured Notes
At New Vision Trust Company, private lending, including secured notes like mortgages with real estate collateral, has become one of our fastest growing segments of Self-Directed IRA funds. The ability of the lender and borrower to set their own terms and collateral together with the speed of New Vision Trust Company’s funding can result in significant advantages for both parties.
Secured Notes – Backed by collateral, providing the lender increased assurance of return on the loan amount and interest. The most common form of collateral for a secured note is real estate. However, notes can also be secured by non-real estate assets.
Unsecured Notes – Not backed by collateral, but you might consider an unsecured note for a qualified borrower. Remember, unsecured notes almost always present a higher risk, though sometimes for a higher reward, than secured notes.
Loan Process
- Set up and fund a self-directed account with New Vision Trust Company.
- Identify a borrower and together determine the load terms including any collateral.
- Submit a Purchase Authorization and the loan documentation to New Vision Trust Company.
Using a Self-Directed IRA to Invest in Private Companies
Investments into private placements are booming – new capital in pre-IPO companies is up over 77% from 2019 according to the National Venture Capital Association. Based on stronger balance sheets, other companies are accessing private capital to expand production or explore new markets. Through a Self-Directed IRA, investors can take advantage of these growing investment trends through private placements.
Private Entities
Private placements typically do not provide easy liquidity for an investor, at least in the short term, but this lack of liquidity can result in higher yields for the investor, a great trade-off for many IRA holders. Should a private company later go public, the tax-deferred nature of IRAs can keep the funds working without taxation until distribution. Within a Roth IRA, future qualified distributions are tax-free.
Types of Private Companies That Can Be Purchased with an IRA
- LLCs
- Corporations
- Partnerships
- Start-ups
- Hedge Funds
- Crowdfunding
- REITS
- Limited Partners
Using a Self-Directed IRA for checkbook control
Be your own record-keeper. Checkbook control allows for instant access of your retirement funds.
Some IRA investors prefer to establish a stand-alone LLC (checkbook control) with the ownership to be funded by the Self-Directed IRA. Drafted by a professional, the specialized operating agreement provides the named manager the ability to open a bank account and make investments that are titled in the name of the LLC. It is the responsibility of the manager to determine the legality of the structure and to ensure that investments are not contrary to the IRS and Department of Labor guidelines.
Tax Deeds & Liens
Using a Self-Directed IRA to Invest in Tax Liens & Deeds
Property taxes continue to grow in thousands of counties across the county. In order to fund the necessary county services, many states collect delinquent property taxes through tax lien and tax deed auctions. Each state holds these auctions a bit differently, but in all cases these tax deeds or tax liens can be purchased within a Self-Directed IRA.
Tax Liens
Instead of selling the actual property, the county sells a lien on the property. The lien is generally for the amount of delinquent taxes, accrued interest and costs associated with the sale. These sales differ from state to state. For example, in Florida the tax liens are auctioned off, starting at a rate of 18% then lowering with each subsequent bid.
Tax Deeds
The property itself is sold, often at the rate of the property taxes owed plus costs and interest. There may be a provision in the state law for a redemption period after the sale should the property owner wish to exercise such an option.
Buying Tax Deeds & Liens Within an IRA
- Set-up and fund a self-directed account.
- Identify the tax deed or lien and whether to invest via live auction or online.
- Inform us and our transaction specialist will assist you through the purchase process.
The Self-Directed IRA
Since the IRA was established by the government in 1974, investing in alternative assets has been permitted by the IRS. In fact, IRS Publication 590, which references IRAs, provides a list of investments that are prohibited; all other investment types may be permissible as long as the IRS rules governing retirement plans are followed.
Prohibited Transactions
The IRS does not tell you what you can invest in. Instead, there are special rules within the Employee Retirement Income Security Act of 1974 (ERISA), that apply to retirement plan investments. The IRS says you cannot purchase the following in your IRA:
- Life Insurance
- Collectibles (including works of art, rugs, stamps and antiques)
- Gems and Jewelry
- Coins (except certain U.S.-minted coins)
- Alcoholic Beverages
- Tangible Personal Property
A prohibited transaction is any improper use of your IRA account by a disqualified person.
Disqualified Persons
IRS rules dictate that a Self-Directed IRA may not: buy an investment from, sell it to, or otherwise by involved with disqualified persons. Disqualified persons include you as the account holder, and your ascendants and descendants. That means up and down your family tree. Here is a more detailed listing of disqualified persons:
- You, your spouse, lineal descendants, lineal ascendants and their spouses or entities they own or control.
- Service provider of the IRA like the custodian you choose and your attorney, CPA or financial advisor.
Allowable IRA Investments May Include:
- Residential Real Estate
- Commercial Real Estate
- Undeveloped or Raw Land
- Real Estate Notes
- Promissory Notes
- Limited Partnerships
- LLC and C-Corp
- Tax Lien Certificates
- Equipment Leasing
- Livestock
- Foreign Currencies
- Stocks, Bonds and Mutual Funds
- Private Placements (Debt and Equity)
- Structured Settlements
- Precious Metals
- Factoring
- Accounts Receivable
- Oil and Gas
Arm’s-Length Investing
IRS Rules state that you and the investment must be at arm’s length. In other words, you cannot directly benefit from an asset owned by the IRA.
Remember, the IRA is built to provide for your retirement and is not intended to benefit you now. It is considered an “indirect benefit” if your IRA is engaged in transactions that, in some way, can benefit you personally. This is strictly prohibited. Some examples include:
- Personally Using IRA Property: Using real estate purchased through your IRA as a personal residence, vacation home, retirement home or office space is not allowed.
- If the IRA purchases a foreclosed beachfront home for example, you cannot live in it or rent it to yourself or any other disqualified person.
- However, it can be rented to others and your IRA can sell the property.
- Receiving Personal Benefits from Your IRA: You cannot lend yourself or any other disqualified person money from your IRA. Additionally, you cannot pay yourself, a company that you own, or any other disqualified person to do work on an investment owned by your IRA.
- Revenue and Expenses: It is important to remember that all expenses related to an investment are paid from the IRA and all profits are returned to the IRA.
- For instance, if your IRA owns a rental property, all revenues (rent) are returned directly to the IRA; all expenses, such as maintenance and taxes, are paid directly from the IRA.
Precious Metals
Using a Self-Directed IRA to Invest in Precious Metals
Whether the purchase of precious metals is for defensive reasons, or simply for appreciation, holding the asset inside an IRA will protect the gains against taxation. If the metals are held within a qualified Roth IRA, the gains are tax free. Additionally, some investors claim precious metals could protect other Self-Directed IRA holdings from value swings based on currency values or other deterioration of economic conditions. Gold, Silver, Platinum and Palladium are also easy to value and are very liquid, providing quick assessment and distribution when needed.
As a Self-Directed IRA custodian, New Vision Trust Company will send the funds to the dealer along with a packing slip for the depository. The metals will be shipped directly to the depository and you will be notified via email upon their arrival.
Types of Precious Metals an IRA can Hold
- Gold
- Silver
- Platinum
- Palladium
Buying Precious Metals within a Self-Directed IRA
- Set-up and fund a self-directed account.
- Identify the precious metals dealer the IRA will buy from and determine the metals to be purchased.
- Select a depository to hold the metal.
Submit a Purchase Authorization and an invoice from the metals dealer to New Vision Trust Company.
How do I know what is the right funding method for me?
Once you have opened your Self-Directed IRA you need to decide how you want to fund your account. Choose one of the three options below to learn how to get started with your investments.
IRA Transfer
Transferring an IRA from another provider is tax-free and easy. We are here to help you every step of the way. Whether you are frustrated with your current provider, paying too much in fees or want more investment freedom, a Self-Directed IRA may be the answer you are looking for.
IRA Rollover
A Rollover is when retirement funds are moved from an IRA or out of an employer-sponsored plan (such as a 401(K)) to a new type of plan or administrator. In an indirect rollover, a distribution is paid directly to you and you have 60 days to “Rollover” to an IRA or new 401(k).
IRA Contribution
IRA Contributions can be made to fund an IRA account by making regular cash contributions each year. This option requires the account holder to be under 70 ½ years of age with earned income. Traditional IRA or Roth IRA contributions can be made after the age of 70 ½. You need to follow the IRA contribution limits.
Discover the Benefits of Self-Directed Retirement Plans
New Vision Trust Company tax-free or tax-deferred retirement, health and educational savings accounts provide the opportunity to save money for the future on a tax-deferred or tax-free basis. Self-directed accounts also allow you to benefit from a variety of alternative investments not available through traditional retirement accounts.