Real Estate IRA’s: Getting Started Right (Part 1 of 5)

September 18, 2017  --  Episode #272

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They say when you have a hammer, every problem looks like a nail.  And when you know about real estate IRA’s, every real estate deal can easily look like an IRA deal.  But should it?  Today we look at step 1 of 5 simple steps to getting started right with a real estate IRA.  I’m Bryan Ellis.  This is episode #272.



My friends, it’s no secret that I’m an advocate of self-directed IRA’s and 401k’s… that’s a big part of what it means to be THE VOICE of the self-directed investor revolution.

But more than that, I’m an advocate of making the best use of your capital.  And here’s the simple truth:  While using an IRA or 401k for your real estate deals is a reasonable default starting point, there are some circumstances under which the IRA or 401k may not be the right venue for executing your next great investment.

And making that decision is step 1 of 5 simple steps to getting started right with a real estate IRA.

Today’s show page can be found at SelfDirected.org/272.

Folks, it’s not really a complicated thing to begin using your self-directed IRA or solo 401(k) as the vehicle through which you invest in real estate.

And much of the time, that will be exactly what you should do.

But before you have that shiny new warranty deed placed permanently in that treasure chest that is your retirement account, there are a few serious considerations for you to ponder.

The central question is:  Does it make sense to do this deal in a retirement account at all?

This is a totally legitimate question.  And while the answer is quite frequently YES, it does make sense to put long-term real estate investments into your retirement account, that’s not always the case.

In fact, I published an article about this very topic in TheStreet.com last year called “Avoid These 5 Traps When Buying Real Estate In a Self-Directed IRA”.  That was the first article I submitted to TheStreet.com, which incidentally was also the first of my articles that received their “Editor’s Pick” award.

Incidentally, it wasn’t my last article published with them, nor was it my last Editor’s Pick award winner.  But that’s another matter.  Hehehe

Anyway, that article is linked for you on today’s show page at SelfDirected.org/272, and I recommend you have a look at it.

So what are some of questions you should ask yourself to make the important decision of whether to do your deal inside or outside of your self-directed retirement account?

I believe question #1 is “How and who will use the property?”

There’s a lot of flexibility with self-directed retirement accounts, but the flexibility isn’t absolute.

For example, some things are downright prohibited.  For example:  If you’re buying a house with the intention of allowing your aging parents to reside in the property, that’s an absolute no-go, and will blow up your IRA irreparably.

Similarly, maybe you’ve found a great piece of commercial property that’s just what your business needs to expand to the next level.   So your plan is to buy it in your IRA or 401k and lease it to your business.

That’s also a no-go… a clear prohibited transaction.  If leasing that building to your own business is the only path to profit for that deal, then that deal isn’t one for your IRA or 401k.

But there are other transactions that are NOT prohibited in your IRA, but which could create an unpleasant present-day tax liability for your IRA.

Examples of that include if you do a lot of real estate FLIPS, or if you lease out your property through services like AirBNB or VRBO.  The IRS views that as a taxable active business.

That’s not necessarily a bad thing if you know it going in and plan for it, but to be surprised by that obligation would be, well, rather unpleasant.

So, moving on to question #2:  “Who will renovate and maintain the property?”  If you’re planning to do the renovation and/or maintenance yourself, or even to have family members be involved in that, you’d really better think twice.

The more that you, or any so-called “disqualified party”, interacts with the property – even in the context of renovations or maintenance, no matter how you are or are not compensated for the work – the closer you come to crossing the with the IRS.

Depending on which IRS agent takes a look at the transaction, they might draw the line as anything from counting your work on the property as an excess contribution to the account, all the way to classifying it as a prohibited transaction.

Now for those of you who are new to the whole self-directed IRA and solo 401k thing, you may not be familiar with the terms prohibited transactions or disqualified parties.

Never fear.  A full description of those things is available to you on today’s show page at SelfDirected.org/272.  Short explanation:  Prohibited transactions are rules that, if you break them, will cause cataclysmic results in your IRA.  Disqualified parties are people that your IRA can’t interact with, lest a prohibited transaction be triggered.  This includes family, businesses you own, etc.

And onward to question #3:  “Where is your investment capital?”

If you have the necessary capital to do the deal both inside and outside of your IRA or 401k, that’s a great place to be, and you have a choice to make which should likely involve an experienced tax attorney.

But if you ONLY have the necessary capital inside of your IRA… or only have it OUTSIDE of your IRA, then the choice is made for you.

I think it’s unfortunate and misleading when I see absolute statements that you should avoid buying real estate in an IRA.  There’s an article like that published by Kiplinger’s – linked on today’s show page – which, frankly, is misleading and detrimental to the otherwise good reputation of Kiplinger’s.

Curiously, the writer of that article has topics like technology, telecom and education in his background.  Absolutely nothing about self-directed retirement accounts, taxes or anything of the sort.  And yet, it’s his advice you might find if you searched this out in Google.

Not good, and shame on Kiplinger’s for publishing such garbage.

Those kinds of academic generalizations are not helpful to anyone.

If there is a good generalization to make, it’s this:  Never do any deal – real estate or otherwise – in your IRA that’s likely to cross the line into prohibited transaction territory.

Other than that, if you find a great deal, and your investment capital is in your IRA and it passes muster with the other questions we’re discussing today, then go for it.

And finally, question #4:  “When do you need to take profits?”  Remember:  IRA’s and 401k’s are retirement accounts.  If the deal you’re considering is for the purpose of building retirement wealth, you’re in good shape to move forward by doing the real estate deal in your retirement account.

But if you’re going to need to have access either to the income or the profits of the deal before you’re about 60 years old, then you shouldn’t use an IRA.  To do so would mean you’d likely be subject to early withdrawal penalties along with some nasty taxes as well.

So there you have it, my friends:  4 easy questions to ponder which will help you make the critical decision:  Should your next great real estate investment be done inside or outside of your retirement account?

Now in the very next episode of this show – the link to which you can reach at SelfDirected.org/272 – we’ll dig in to Step #2 of 5 simple steps for getting started right with a real estate IRA or 401k, and that step is:  Determine whether an IRA or a 401k is the right tool for your deal!

That’s a very, very important decision… and I’ll tell you how to make it with confidence.

In the mean time, I’m wondering what you think… Do you tend to default towards using your IRA or 401k for real estate deals… or maybe do you even assume you should NOT do so?  Sound off on today’s show page at SelfDirected.org/272 and let me know what you think.

Next week, we’re going to look at some strategies and tools for doing deals tax efficiently even when the IRA or 401k is NOT the best option for you, so be looking forward to that.  But in the mean time, we’ve got 4 more simple steps to cover so you can get started right investing in real estate through your IRA or 401k, and Simple Step #2 is coming up in the next episode!

And very quickly… Thank you.  Thank you for listening to this show.  I really do appreciate you.  Past the bluster of being the voice of the self-directed investor revolution and my sometimes heady pronouncements, I want you to know that this show is succeeding, succeeding very, very well… and it’s because of YOU.  And I’m grateful to you.

My friends… invest wisely today, and live well forever!


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Bryan Ellis

I am host of Self Directed Investor Talk, which I'm told is America's #1 podcast and for affluent self-directed investors. I'm also something of an expert in self-directed IRA's, solo 401k's and 1031 exchanges. You can find more of my writing in some cool places like TheStreet.com, Entrepreneur.com, ThinkRealty and even Forbes (that was always one of my goals!). I live in metro Atlanta, Georgia with my wife and business partner Carole Ellis(she's a real business partner... not just because she's my wife... I'd want to work with her if I wasn't married to her... and I'd want to marry her, too). I also have 4 children ranging in age from 2 to 20 (yes, you read that correctly). It's my goal to be the name everybody thinks of when they think of Self-Directed IRA's and Solo 401(k)'s.