One of the many reasons real estate is a predominant IRA asset is the multiplicity of investment strategies available to retirement investors. There are more ways than one to enjoy the tax-advantaged benefits of a retirement account while simultaneously capitalizing on promising real estate investments.
Below are three common real estate IRA investment strategies. Visit New Direction IRA’s real estate page to learn more about these options and the other investment strategies for your real estate IRA.
A real estate IRA can secure a loan to purchase a rental property. IRS rules mandate that the loan must be a non-recourse loan, which means the lender is acknowledging, in the case of default, that their only avenue for remuneration is the property itself. Not all lending institutions and banks offer non-recourse loans, but there are many banks that do service these types of loans. A non-recourse loan can also come from a private lender.
When an IRA purchases real estate using a non-recourse loan, the debt-financed portion of the property’s profits may be subject to Unrelated Business Income Tax (UBIT). UBIT is a cost of doing business when your IRA receives net profit from money that you didn’t personally contributed to your IRA (i.e. the loan money). Consequently, if an IRA-owned property is sold while a percentage of ownership is still debt-financed, the profits derived from the debt-financed percentage may also be subject to UBIT.
However, if debt-leveraging allows an IRA owner to purchase a potentially more lucrative property than they would have been able to afford with their own funds, it can still be worth it for investors to pay UBIT and utilize a debt-leveraging strategy. Talk with your trusted financial professional to calculate the potential cost of UBIT for your investment opportunity.
Tenants-in-common is one of the ways that an IRA can participate in real estate without possessing the entire purchase price of a rental property. Your real estate IRA can partner with another investor’s personal funds, another investor’s IRA, a company, or another entity. With this strategy, your IRA can even partner with an otherwise disqualified persons.
One of the ways retirement investors can use private equity to invest in real estate is through the creation of an LLC. In this strategy, the asset in your IRA is shares of a private company, or percentage ownership in that company. An LLC through a self-directed IRA provider can allow a retirement investor to use the private equity of the LLC to invest in a rental property.
Real estate is an asset that will always be in demand. Paired with the unique tax-advantages inherent to retirement accounts, real estate can help retirement investors get ahead in their retirement savings.
This article was written exclusively for Rentometer by New Direction IRA