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August 19, 2021
Hi again! Let’s get right into this topic.
How are you going to take title to the property you intend to own within your self-directed IRA?
Whether that’s a self-directed traditional, a self-directed Roth, a SEP, how are you going to do this?
Ultimately for us – a self-directed IRA custodian – we can’t tell you how you should do it. Some clients – if they’re just buying one rental property – may just take title to that property in the name of their IRA. While we can process perfectly fine, there are other considerations to make.
Maybe you want to set up an LLC. Maybe the LLC takes title to the property, and the owners of the LLC are your IRAs. We can do it that way. You can also use a trust. You can use any type of entity out there. It’s ultimately your decision on how to do that.
Obviously, entities take up a little bit of extra costs in some case, but ultimately it depends on you. And it depends also on the type of real estate you buy.
Single family residences are safe. However, if you’re going to invest in things like multi-family or commercial property, then an entity might make more sense. Just check with an entity specialist before entering into any type of investment.
Within investment property in your IRA, you have to be careful about how active you are in that investment.
As the IRA owner – and the fiduciary of that IRA – you must distance yourself from the investment. More specifically, you cannot do the rehab yourself. You can’t actively manage it.
You can pick the renters that live in that house. You can pick the contractors that work on that house.
However, if you have a lot of investments in your IRA that are real estate related, you might be better suited to have a property manager to:
With whatever is left over, they can send that to NuView to be deposited into your IRA as net profit.
We don’t care which way you do it. You can have renters pay rent to your NuView account (deposited tax-deferred or tax-free) or use a property manager.
How much capital do you have in your IRAs?
The cool thing about IRAs – or self-directed IRAs – is that you can partner accounts together. (That’s something I like to do.)
Let’s say you and your spouse each have Roth IRAs. You might have a SEP IRA or a 401k because you’re self-employed. You might have an HSA or health savings account. You might even have education savings accounts set up for your kids, or your grandkids. All of these accounts can partner together and buy a piece of real estate.
Now, the important part to remember is that when you have multiple accounts partnered together, you have to pay expenses, and collect income pro-rata.
This means that each account has a percentage of ownership, and you have to stick to those percentages when you pay things and collect things.
Non-recourse lending can help you with the consideration number three: where’s the capital coming from?
Non-recourse loans are great to add capital to your IRA so that you can buy more investments, or have a little cash sitting there in case of emergencies.
However, with non-recourse loans to your IRAs, you do have to factor in unrelated debt-financed income tax.
It’s not something to be scared of, just something to be aware of. And there are a lot of different solutions as to how to minimize that unrelated debt-financed income tax, or in some cases eliminate it completely.
Remember, required minimum distributions (RMDs) play a part in retirement accounts, especially if it’s pre-taxed like a traditional IRA.
At age 72, you’re expected to take distributions in retirement, and you’re no longer allowed to make contributions.
This could affect the assets you hold within a traditional IRA if it’s real estate. Remember: taking an RMD is different when you have a house that is your asset. You can take the porch as your distribution. You have to take cash as a distribution.
Here’s the cool thing: if you have multiple IRAs that hold real estate like those offered at Nuview, and you’ve got some fidelity IRAs, you could take or satisfy your RMD from any custodian, as long as it satisfies all the RMDs that you have.
Oftentimes, it’s easy to just sell stock at fidelity. Take your RMD there; that satisfies both accounts, and you can keep the real estate in your NuView account growing tax-deferred, or tax free.
I hope this helped you gain a little understanding of what you should consider before buying real estate in an IRA or a self-directed IRA here at NuView.
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