Have you ever heard of a Self-Directed IRA (SDIRA)?

by | Jun 3, 2023 | Investment, Multifamily

Did you know you can invest in real estate with you IRA?

Over the years, I’ve experienced that real estate is a better investing strategy for my family compared to the stock market. Even though I personally don’t like investing in the stock market, I continued to invest in an IRA for tax deferred reason. What I didn’t know is there is a thing called “Self-Directed IRA” that gives you control over where and what you can invest your IRA in.

These investments grow tax-deferred; so, earnings can compound faster than they could outside of the account. The IRS allows a wide variety of investments choices for these accounts and the one that attracted me the most is real estate.

Here are a few examples:.

  • Real estate.
  • Undeveloped or raw land.
  • Promissory notes.
  • Tax lien certificates.
  • Gold, silver and other precious metals.
  • Cryptocurrency.
  • Water rights.
  • Mineral rights, oil and gas.
  • LLC membership interest.
  • Livestock

The catch is you must move your IRA from your current account to a specialized firm that offer SDIRA custody services. Most of the traditional IRA account holders do not do provide SDIRA accounts and will try to talk you out of transferring your account. The reason is they are losing the fees that they are currently charging you. There are many SDIRA custodians to choose from and they also have fees so it’s important to shop around. You also need to be aware that SDIRA custodians can’t give financial or investment advice, so the burden of research, due diligence, and management of assets rests solely with you as the account holder. They are only there to ensure that when you are investing that you are following the IRS rules to keeping this a tax deferred investment.

Lastly, the most important thing to be aware of when investing in Real Estate with your SDIRA is you still could be taxed because of what is called an Unrelated Business Income Tax (UBIT). This tax comes from any of the funds that you leverage to purchase the property.

If your IRA took out a loan to purchase property, any earnings yielded from the leveraged portion of the asset (referred to as Unrelated Debt-Financed Income or UDFI) may incur UBIT. For example

  • Your IRA holds a rental property. It paid cash for half and financed the other half (50%).
  • The rental property earns $10,000 in a given year. Since the debt percentage is 50%, half of those earnings ($5,000) will be taxed at the current UBIT rate.

The debt percentages from each of the previous 12 months will be averaged to represent the single debt percentage for that year. Profits garnered from the sale of a debt-leveraged property will also be subject to UBIT, but not at the current Trust Rate. Such profits would be taxed as capital gains.

If you have any additional questions, please contact us.