Self directed IRA account holders are allowed to invest in real estate, and this is a simple process with big benefits since the account holder has the power to make all the investment decisions on behalf of the IRA. The biggest advantage of a real estate IRA is that all income is tax deferred until such time that a distribution is taken. With a traditional IRA, until the owner turns 70.5 years old, no distributions are required. If it is a self directed Roth IRA LLC, the owner enjoys completely tax-free gains.
Here is an example. If, as the self directed Roth IRA owner, you buy a property through the self directed IRA for 0,000 and sell it at 0,000, the profit is tax free. But if you invested in the property with your personal funds, you would need to pay federal income tax on the 0,000 profit in addition to state income tax, depending on where you live.
Buying your property
Your IRA custodian will most likely let you invest in land, residential or commercial properties. There are custodians who also allow overseas or leveraged property. In certain situations, the cost of the property may be more than what's available in your IRA. In such cases, you can buy the property jointly with other owners or leverage the purchase by applying for a non recourse loan. The property thus purchased cannot be used as your personal residence or business premises, the point being that you cannot personally benefit from the property as this can result in tax implications.
Distributing your real estate IRA Property
When you reach the retirement age of 59.5 years, you can withdraw your real estate IRA to use the property as a second residence. At this point, you can choose to sell the property through your IRA or opt for a distribution in kind. What happens in a traditional IRA is that the IRA custodian assigns you the property title, making you liable for income taxes on the property's present value. If it is a Roth IRA, the distribution is tax-free.
Rules related to required minimum distribution in self directed real estate IRA
At the time of establishing the self directed IRA, the account holder must nominate primary and secondary beneficiaries. These are usually a spouse or children. The benefit here is that the IRA can be rolled into the spouse's name and this carries a tax benefit. If a specific trust is nominated as the beneficiary, the account holder must adhere to the required minimum distribution rules or RMD.
According to the RMD rules, the IRA holder or beneficiaries must withdraw their retirement money at a specific time in the future. There are different rules related to traditional IRAs and Roth IRAs. In the case of a self directed IRA the rules are unique. If the IRA has pre-tax funds, the account holder's distributions must begin at the age of 70.5 on an annual basis. If it is a real estate IRA or other private business interests, there is a likelihood of the IRA having no cash and the distributions become complex. The account holder could end up paying large income taxes or incur penalties for not taking the RMD, all without actually seeing the cash.
It is important to know your options when you invest in real estate with your self directed IRA. Most self directed IRA owners prefer to opt for a non recourse loan through non recourse lenders as it benefits them by protecting their other assets and from personal liability.