For self-employed realtors, the low interest rate environment of the past five years, new housing growth and steady climb of equity in residential real estate has fueled one of the strongest sustained housing markets in recent decades. Many realtors have no doubt benefited from a healthy environment for their services and their own investments in various forms of real estate. What many self-employed realtors may not be aware of is the fact that the success they've enjoyed in their real estate investments, they could also be experiencing with the funds held in their self-directed IRA or Solo 401(k).
Part of the reason that this type of investment (in tax-deferred retirement plans) is not better known is the fact that most banks, brokerage firms or fund companies do not permit clients to invest in real estate in their IRA or Solo 401(k). It's only been over the past fifteen to twenty years that we have seen the emergence of custodians specializing in alternative investments, like Millennium Trust, who allow self-directed IRA owners to hold real estate in their self-directed IRA or Solo 401(k).
Many investors mistakenly believe that these types of investments in real estate are not permitted by law or IRS Code. The truth is that there are only three types of investments explicitly prohibited in IRAs by statute -- life insurance, collectibles, and Sub-Chapter S Corporations. Solo 401(k)s have no explicit prohibitions on specific investments at all.
Self-employed realtors looking to take advantage of these types of investments in their retirement plans should know the basics.
Invest in a Wide Variety of Property Types
There is a wide range of types of real estate that can potentially be held in an IRA/Solo 401(k). The range may vary from custodian to custodian, but certain entities, such as Millennium Trust, have the knowledge, experience and expertise to provide the custody services required to hold the following types of properties in Self-directed IRAs/Solo 401(k)s:
- Raw Land
- Pre-Construction
- Residential Property
- Condominiums
- Condo-Tels
- Multi-family Units
- Commercial Property
- Apartment Buildings
Investors may purchase and hold real estate in a variety of ways as well. Besides holding the actual real estate property, for example, investors may use their IRA funds to buy into a real estate development project with other investors.
The type of property purchased within an IRA will often be determined by the resources available in the IRA, the type of property desired and the market conditions in a specific real estate market. The range of options available includes an outright purchase of the property to leveraging the purchase with a non-recourse loan. Consider self-directed IRAs for investors using one of the following purchase methods:
- Real Estate: actually holding the property in the IRA;
- Debt-financing: financing the purchase with debt, such as a non-recourse loan;
- Mortgage/Deed of Trust: holding a mortgage or deed of trust to the property in the IRA;
- Tax Lien: holding a tax lien to the property in the IRA.
Regardless of the type of property purchased, IRA account owners should be aware that there needs to be enough funds in the IRA or income coming into the IRA to take care of annual expenses such as taxes, insurance, repairs, maintenance, etc. In addition, these expenses cannot be paid by the IRA owner outside of the IRA without risking the potential for a taxable distribution of the real estate with corresponding penalties. Realtors should speak with the appropriate tax, and/or legal advisors before making a purchase.
Owning Real Estate in an IRA has its Limitations
Investing IRA funds in real estate is not for every investor and there are certain restrictions and prohibitions which you need to understand before considering this type of investment. The fundamental thing is that the IRA account owner must understand that the property is held by the IRA and that the account owner cannot receive any benefit from the investment. There are severe prohibitions against the IRA account owner (and certain family members) using or being involved with any transaction concerning the property held in the IRA.
Investors are encouraged to consult with their tax and legal advisors to insure that the transaction does not violate any of the prohibited transaction rules. Any transgression of these restrictions could result in dissolution of the tax-advantaged status of the IRA, mandatory distribution of the IRA, and tax and penalties on the distribution.
Millennium Trust Company, LLC does not offer any investment or management advice. Holding alternative assets (generally identified as investments other than stocks, bonds and mutual funds) in IRAs and Solo 401(k)s present unique issues. Investors are encouraged to consult with their tax and/or investment advisor. For more information about the custody of alternative investments, such as real estate, in your IRA or Solo 401(k), visit our website or call our client services department at 1-800-258-7878.
