What is a Self-Directed IRA for Real Estate?

Written by Posted On Tuesday, 16 July 2019 15:44

What is a Self-Directed IRA for Real Estate?
A self-directed IRA is not a legally defined term; it’s just a term that describes an account that allows somebody to buy what they want to buy. Those involved with self-directed IRAs probably look at the definition a little bit differently than the Wall Street world does. The Wall Street world treats it as an account that’s going to allow you to buy something off the menu of Wall Street options, but, in fact, a truly self-directed IRA is going to be something that allows you to invest in anything the law allows. With a self-directed IRA, this could be anything other than stock in a Subchapter S, life insurance contracts, or collectibles. A self-directed IRA is really wide open; if it’s not specifically prohibited, it’s allowed.

Most of the people who come to us interested in self-directed IRAs do so because they’re interested in buying real estate or making loans, buying notes, or doing some business startup stuff. There is really no hindrance to any of those options.

A basic self-directed IRA would merely be a transfer into a custodial account with a self-directed custodian; to make an investment, you submit the investment to the custodian. Upon their approval, they’ll make the investment. This works very well for passive investments, things that are not going to be time sensitive. Because once again, the custodian has to approve the investment prior to the investment being made.

But imagine if you were going to buy a piece of real estate and manage that asset. How would you, for example, pay that plumber when you have a Christmas Eve pipe break? So when we’re looking at a self-directed IRA for real estate, we’re typically going to create what we call a checkbook IRA or an IRA LLC.

Can a Self-Directed IRA Invest in an LLC?
Every checkbook IRA is an investment in a limited liability company. With a checkbook IRA, we create that basic custodial account, but then we insert a limited liability company between the custodian and the ultimate investment, creating an IRA-specific operating agreement. This is critical. The custodians will not make an investment into just a generic operating agreement. This is why you need someone to do this who understands what is required, specifically the custodial requirements. Furthermore, you have to understand each custodian is going to have different requirements when it comes to that IRA LLC and what they’re going to want to see to maintain its compliance. 

In short, a self-directed IRA can invest in a limited liability company, and nine times out of ten if we’re talking about real estate, that’s what’s going to happen.

The process involves moving money from the one custodian that won’t allow the investment into a new custodial account. We create that IRS specific operating agreement, the LLC’s articles, and the federal tax I.D. number. We direct the investment into the limited liability company that funds the bank account. The member of the LLC is going to be the trust company for benefit of a taxpayer’s IRA. The manager of the LLC typically is going to be the taxpayer, and as manager of the LLC they’ve got the power of the pen. So they’re just going to go out to buy a piece of property and write a check to do it—for the earnest money, the purchase sale agreements between the seller and that IRA LLC. It works beautifully!

In this way management is taken care of, and at time of sale, once again, you’ll just have a listing agreement between the limited liability company and the broker. At the time of close, the funds go back into the limited liability company’s checking account.

You really can’t afford to deal with less than IRA experts when planning for your retirement: it’s just too important, and the laws covering IRAs can very complex. Put David and the entire team of professionals at Equity Advantage on your side today. Call to get started, 503-619-0223!

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What is a Self-Directed IRA for Real Estate? IRA Advantage
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David Moore

David Moore, CEO, founded Equity Advantage with his brother Tom in 1991, after a successful real estate investment career. David is a nationally recognized expert on 1031 exchanges and a former board member of the Federation of Exchange Accommodators. David is a Certified Exchange Specialist (CES).

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