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Self-Directed IRA Real Estate Rules

Property Management and Tenant Placement

Self-Directed IRA Real Estate Rules

self directed IRA

Are you planning on using your self-directed IRA for investing in real estate? If so, before purchasing your first property, you have to know the self-directed IRA real estate rules.

Understanding how a self-directed IRA works is important because this IRA offers you a ton of advantages but, if you break the rules, it’s quite possible that you could put yourself in a position of having to pay heavy taxes and penalties.

In this article, I’ll break down some of the self-directed IRA rules and provide you with tips on how to purchase real estate using your self-directed IRA.

Understanding The Self-Directed IRA Real Estate Rules

If you’re new to investing and you just recently opened up a self-directed IRA, you need to know that a self-directed IRA is different from other traditional individual retirement accounts.

With a self-directed IRA, you can invest in much more than real estate, stocks, bonds, or securities. You can invest in things like precious metals, private placements, commodities, tax lien certificates, and limited partnerships.

Rule #1 – You Can’t Purchase A Property That’s Owned By A Disqualified Person

The first Self-Directed IRA rule that you have to know is that you cannot purchase a property that’s owned by you or a disqualified person.

When it comes to the term ‘disqualified person’, this can have a pretty extensive definition. This person can be your spouse, employer, children, parents, your spouse’s parents, or your lineal descendants.

You also cannot purchase real estate using your self-directed IRA from any business entity that you have a direct, or indirect, ownership stake of at least 50%.

Rule #2 – You Can’t Have Indirect Benefits

The next thing that you need to know about purchasing real estate with your self-directed IRA is that you cannot have any indirect benefits.

For example: This means that you cannot purchase a property that you intend on using as a vacation home.

Rule #3 – The Property Has To Be Uniquely Titled

Once you purchase a property using your self-directed IRA, it is also important for you to know that the property has to be uniquely titled.

What this means is that the property cannot be in your name, it has to be in the name of your self-directed IRA because both you and your IRA are technically ‘two separate entities’.

Rule #4 – Expenses Must Be Paid From The IRA

Another important rule to know about yourself self-directed IRA is that any expenses that the property has must be paid from the IRA, and not you. These expenses can include utility bills, renovations, maintenance fees, building inspection fees, and property tax.

Rule #5 – Income That’s Generated From The Property Must Return To Your IRA

Once your rental property starts generating income, any income from that property must be paid back to self-directed IRA.

Rule #6 – Your Property Can Be Purchased With A Combination Of Funds

When purchasing real estate using your Self-Directed IRA, you should also know that the property that you purchase can be acquired with a combination of funds, including partnerships.

Rule #7 – Your IRA Must Pay UBIT If You Finance Your Purchase

Last of all, but most important, you should also know that if you finance your property purchase, you will have to pay (UBIT) Unrelated Business Income Tax.

Due Diligence Is Required When Purchasing Investment Properties

Even though you may be purchasing investment properties using your IRA, it’s also important for you to know that due diligence is still required before purchasing an investment property.

Due diligence means that you’re going to take the time to research the area, do a comparative analysis of similar properties that are nearby, review the financials for the property, have the property inspected and if you plan on financing, you should get multiple bids for financing.

Even though due diligence isn’t glamorous, it is by far one of the most important elements of being a real estate investor because it’s going to eliminate any surprises along the way.

Most Real Estate Investors take pride in “turning over every stone” so that they can eliminate any post-transaction surprises which may pop up and end up costing them money.

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