“I am not a product of my circumstances. I am a product of my decisions.”

Stephen Covey, American educator, author, and businessman

Investing with Your IRA

There are many ways to make money, especially by using your IRA to own and control both real estate and the mortgages/debt associated with that real estate. Take a look below at all of the investments available to anyone who has a self-directed IRA or 401K plan:

Residential real estate—including apartments, single family homes, and duplexes
Commercial real estate
Undeveloped or raw land
Real estate notes (mortgages and deeds of trusts)
Promissory notes
Private limited partnerships, limited liability companies, and C corporations
Tax lien certificates
Foreign currencies
Oil and gas investments
Publicly traded stocks and bonds
Private stock offerings, private placements
Judgments/structured settlements
Gold bullion
Car loans
Factoring investments
Accounts receivable
Equipment leasing

All of these categories of investment can provide substantial returns PROVIDED YOU KNOW WHAT YOU ARE DOING. An investment vehicle in and of itself is never risky. It’s the combination of the investment and an ignorant INVESTOR that is risky. This is true across all markets regardless of the investment vehicle. Cave Buyers, LLC is highly vested in both real estate and notes with the natural outcome of passing this information on to you. We don’t know a thing about oil and gas, or stocks and bonds, but we are experts in the real estate investment arena, including mortgages and deeds of trust. Let’s look first at the Real Estate IRA…

Real Estate IRA

There are three things that you should know about a real estate IRA:

1. The term "real estate IRA" encompasses any type of real estate investment in a self-directed IRA or 401(k).

2. When you combine the advantages of a self-directed IRA with your knowledge of real estate, IRAs allow you to earn tax-free/tax-deferred returns on your investments.

3. The rate of return on your investments is based on knowledge and expertise in real estate (This is where Cave Buyers comes in.) IRA investing is not based on the ups and downs of the stock market. It IS, however, subject to market forces in the real estate market.

Real Estate in IRAs

The Little-Known Secret That Allows Real Estate Investors to Create True Wealth

Historically, real estate has given many Americans a stable investment vehicle that provides both income and appreciation. One of the greatest tools available to real estate investors is government-sponsored retirement plans, such as IRAs and 401(k)s.

Most investors believe that their only IRA investment options are bank CDs, the stock market, and mutual funds.

Few Americans realize that they have the option to self-direct their IRAs and other retirement plans into real estate—and that they can benefit from the tax advantages those plans provide. IRA investments earn tax-deferred/tax-free profits.

Imagine not having to pay taxes right away—or ever—on your real estate deals. Instead of paying 25%, or 30%, or even 50% of your profits to the government in taxes…you keep it.

Additional advantages of the real estate IRAs include:

The power of compound interest
A reduction of taxable income
Asset protection
Estate planning

If you're a successful real estate investor, or if you're just looking to diversify your retirement portfolio, the combination of real estate and your IRA can be very powerful.

Types of IRA Real Estate Investments

Here's a partial list of real estate-related investments that you can make with a real estate IRA:

Raw land
Single-family homes
Commercial property
Apartments
Duplexes
Condos/townhomes
Mobile homes
Real estate notes
Second mortgages
Partial notes
Real estate purchase options

Your IRA may NOT be a self-directed IRA. If you are restricted from investing in real estate, then you are NOT in a Self-Directed IRA. Cave Buyers strongly recommends talking to experts in this field, and one of the most prominent is Quest. Check them out for more information. Their website is here:

www.questtrustcompany.com or www.questira.com

Real Estate IRA Rules

Seven Things You MUST Know about Investing in Real Estate with a Self-directed IRA

1) Your IRA Cannot Purchase Property Owned by You or a Disqualified Person:

One of the most common questions about a real estate IRA is: “Can my IRA purchase a property that I currently own?” The answer is always no.

IRS regulations don't allow transactions that are considered "self-dealing," and they don't allow your self-directed IRA to buy property from, or sell property to, any disqualified person, including yourself.

2) You Cannot Have “Indirect Benefits” from Property Owned by Your Self-Directed IRA:

Can your self-directed IRA purchase a vacation home for you to occasionally use? Can you rent office space for yourself in a building that your self-directed IRA owns?

No.

The purpose of the IRA is to provide for your retirement at some future date. It's not intended to benefit you (or any other disqualified person) today. If your IRA engages in a transaction that, in some way, benefits you or a disqualified person, this is considered an "indirect benefit."

3) Real Estate IRA Investments Are Uniquely Titled:

You and your IRA are two separate entities. As such the investment needs to be titled in the name of your IRA—not in your personal name. All documents related to the investment must be titled correctly to avoid delays.

The correct title for most real estate IRA investments is:

"Equity Trust Company Custodian FBO [for benefit of] [Your Name] IRA"

4) Real Estate in an IRA Can be Purchased without 100% Funding from Your IRA:

You can purchase property in more ways than just an outright purchase of the full amount from your account. These other options include using undivided interest and partnering with others.

5) IRA Investments that Use Financing Must Pay UBIT

Your self- directed IRA can purchase real estate using financing as long as the loan is non- recourse. If you do use financing, unrelated business income tax (UBIT) is due. Speak with your accountants and/or tax attorneys for more information.

6) Real Estate IRA Expenses Must Be Paid from Your IRA:

All expenses related to property owned by your self-directed IRA (maintenance, improvements, property taxes, condo association fees, general bills, etc.) must be paid from your IRA.

7) Real Estate IRA Income Must Return to Your IRA:

All income generated by property owned by your self-directed IRA must be paid into your IRA.

Purchasing Real Estate in IRAs

How Do I Purchase Real Estate in an IRA?

This is one of the most common questions regarding IRAs.

Purchasing real estate in your IRA isn't much different from a normal purchase of an investment property. There are a few exceptions, but this is the basic process:

Open a self-directed account and fund the account through a contribution, transfer, or rollover. Again, Cave Buyers recommends Quest IRA, and you can reach them at www.questira.com.
Identify the investment property—make sure you follow self-directed IRA rules.
Complete the necessary paperwork to effect the transfer.
Check that correct titles are on all documents—e.g., “Quest IRA FBO [Your Name] IRA.”
Ensure that all payments made to and expenses paid from the investment go through the IRA.

When you're ready to sell the property, your custodian provides the necessary paperwork and works with you and your title company/closing attorney to complete the transaction. All proceeds from the sale are tax free and go back into your IRA.

Own Rental Real Estate in Your IRA

Obviously, if you can’t put your own house in your IRA, then most likely you’ll be putting in Rental Properties. With a self-directed IRA, you can own rental real estate or other types of property that generate income and expenses.

All expenses and income related to property owned by your self-directed IRA must be paid from, and returned to, the IRA.

Real Estate IRA Income: How Funds Get Back to Your IRA

Here are some key points to remember about property income:

All profits/income related to the investment must return to your self-directed IRA.
Renters/Payers must write checks to your self-directed IRA, not to you personally. For example, a check would be made out to:

“Quest IRA Custodian FBO IRA#1234”

If you use Equity Trust, they will provide deposit coupons to accompany any checks for deposit, and coupons must be submitted with payments.
Checks can be remitted from renters/payers directly to Equity Trust (with deposit coupons) or they can be sent to the IRA owner and then forwarded to Equity Trust.
IMPORTANT: You are not permitted to deposit IRA payments into your personal accounts. Checks must be deposited directly into your self-directed IRA. Co-mingling of funds could be considered a prohibited transaction. Do NOT do this. EVER.

Property Expenses

Here are some key points to remember about property expenses:

All expenses related to the investment must be paid from your IRA proportionate to your IRA’s investment in that property. For example, if you purchased a 50% interest in the investment, then 50% of the expenses must come from your IRA (i.e., 50% ownership of property = 50% expenses).
You must complete an investment form to instruct Quest IRA to make a payment from your account. Reoccurring expenses can be automated at Quest IRA.
IMPORTANT: You are not permitted to pay IRA expenses from your personal accounts. Expenses must be paid from your self-directed IRA. Co-mingling of funds could be considered a prohibited transaction.

Prohibited Transactions Under the Provisions of ERISA

A prohibited transaction, including prohibited real estate IRA investments, can bring into question the tax-deferred status of your account, potentially resulting in the disqualification of your IRA and severe tax consequences.

The following is the definition of a prohibited transaction that comes from IRS Publication 590 and speaks of those acts that you should avoid so as not to incur additional taxes and other costs, including loss of IRA status.

“Prohibited Transactions"
Generally, a prohibited transaction is any improper use of your traditional IRA account or annuity by you, your beneficiary, or any disqualified person.
Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).

The following are examples of prohibited transactions with a traditional IRA:

·Borrowing money from it.

·Selling property to it.

·Receiving unreasonable compensation for managing it.

·Using it as security for a loan.

·Buying property for personal use (present or future) with IRA funds.”

-Source IRS Publication 590

Further Information

Section 4975 of the Internal Revenue Code - Internal revenue code referencing prohibited transactions with IRAs.

Three Most Popular Ways to Invest in Real Estate with a Self-directed IRA

There are three basic ways to purchase real estate with a self-directed IRA:

Purchase with cash
Partner with family, friend, or business associate
Borrow money for investment

1) Purchase with Cash - The Most Straightforward Approach

If you have sufficient funds in your self-directed IRA to cover the purchase price, closing costs, taxes, insurance, etc., you can purchase a property outright. All ongoing expenses are paid in total from your self-directed IRA, and all income/profits are returned in total to the IRA.

2) Partner with Family, Friend, Business Associate

If you don't have enough funds for a cash purchase, your self-directed IRA can purchase an undivided interest in a property.

For example, your self-directed IRA could partner with a family member, friend, or business associate to purchase a property for $100,000. The friend could provide 70% of the purchase price ($70,000), and your self-directed IRA could purchase the remaining 30% ($30,000).

All ongoing expenses must be paid in relation to your percentage ownership. In our example, for a $1,000 property tax bill, the friend would pay $700 (70%) of the bill and your self-directed IRA would pay $300 (30%).

Likewise, if the property collected monthly rent of $1,000, the friend would receive $700 (70%) and your self-directed IRA would receive $300 (30%).

3) Borrow Money (Receiving a Loan) for Investment:

An IRA may obtain financing (loan/mortgage) for a real estate investment. However, you must be aware of two points when considering this option:

Loan must be non-recourse - Per IRS regulations, an IRA cannot guarantee a loan or be used as collateral. A non-recourse loan only uses the property for collateral. In the event of default, the lender can collect only the property and cannot go after the IRA itself.
Tax is due on profits from leveraged real estate - If your IRA uses debt financing (i.e., obtains a loan) on a real estate investment, a tax will probably be due on profits. This tax is called unrelated business income tax (UBIT).

Partnering to Purchase Real Estate with an IRA

If you don't have enough funds for a cash purchase of real estate with your IRA, you can partner with others.

Okay, so you're ready to take advantage of all the benefits of real estate in a self-directed IRA—the tax-free profits, the asset protection, and the potential for high returns and creating lasting wealth. You even have a couple of investment properties that you're ready to purchase.

The only problem...? You don't have enough money in your IRA to purchase the property outright, and you don’t want to get a non-recourse loan.

Fortunately, you have options—including having your self-directed IRA partner with other investors to purchase the property. This is often called "purchasing an undivided interest" in the property.

How to Partner to Purchase Property with Your Self-Directed IRA

Here's how to purchase property with a self-directed by partnering with other investors:

Seek out potential partners in friends, family members, co-workers, or business associates.
Once you’ve identified a partner for the deal, combine your self-directed IRA funds with the other investor’s funds to purchase the property.
Your self-directed IRA then owns a percentage of the property proportionate to the percentage of funds you contributed.
Your self-directed IRA is responsible for a portion of all property expenses equal to the percentage of ownership, and the same portion of all income related to the property goes into your self-directed IRA.
Once the property is sold, your self-directed IRA receives a portion of the proceeds matching the proportion of your original investment.

Isn't Partnering with Myself or Family Members a Prohibited Transaction?

While the premise is somewhat similar to a prohibited transaction, they're actually two completely different scenarios. The difference is based on who currently owns the property or investment.

If you, a family member, or other disqualified person already owns a property, then investing in that property with your IRA is prohibited.

However, in the partnering scenario, if you and a family member or other partner, want to purchase a new property that's not already owned by a disqualified individual, this is not a prohibited transaction.

A Partnering Example with Your Self-directed IRA

Let's assume that the property you want to purchase costs $100,000, but your self-directed Roth IRA has only $20,000. You reach out to a friend of yours who has $30,000 in a traditional IRA and a business associate who can invest $50,000 of his own money. Combining the money together, you now have sufficient funds to purchase the property.

Your self-directed Roth IRA now owns a 20% interest in the property. Title for the property reads:

Quest IRA FBO [Your Name]

Roth IRA 20% Undivided Interest

Going forward your self-directed Roth IRA is responsible for 20% of all expenses related to the property. Similarly, your self-directed Roth IRA receives 20% of all income generated by the property.

A year after purchasing the property, you and your partners decide to sell it for $150,000. With a 20% interest, your self-directed Roth IRA receives $30,000 or 20% of the sale proceeds—an amazing 50% return ($10,000 profit) on your original $20,000 investment.

As you can see, even without a large bankroll to start out, you can still create profitable real estate investments with your self-directed IRA.

NOTE: While this type of transaction is fairly straightforward and common, you'll want to make sure it's at "arms-length" and that you avoid the possibility of "self-dealing," both of which are prohibited by IRS regulations. Consult with a financial or tax professional.

Real Estate FAQs

What are the differences between buying real estate for me, personally, and purchasing a real estate investment for my IRA?

There are four main differences between purchasing real estate for yourself and for your IRA:

Title - When purchasing an asset for your IRA, it must be properly titled to your IRA. Specifically, it must read " Quest IRA Custodian FBO [Your Name]IRA."
Funding - When purchasing an investment (or any portion of an investment) for your IRA, funds must come directly from your IRA. Equity Trust will send the funds directly to the title company/closing agent/attorney per your instructions.
Expenses/Income - Any expenses associated with your IRA investment must be paid from your IRA and any income must be paid into your IRA.
Signatures - Documents pertaining to your IRA investments must be signed by the custodian serving on behalf of your IRA.

Can my IRA purchase real estate that I currently own?

No. This is considered a prohibited transaction (see IRC 4975). You may not purchase a property, or interest in a property, that is currently owned by a disqualified person (this includes you and family members of lineal descent).

Can my IRA purchase real estate that my corporation, partnership, or LLC owns?

No. See the previous question.

May I live in or work in a property that my IRA owns (e.g., personal residence, retirement or vacation home, office)?

No. This is considered a prohibited transaction (see IRC 4975).

Can I pay funds directly to a seller?

Yes, by completing an investment form, you instruct Equity Trust where to send the funds. Typically, funding to purchase real estate is sent to a title company, attorney, or escrow agent. Funds can be sent by check, cashier’s check, or wire.

Can I transfer/rollover funds from an existing IRA, 401(k), or 403(b) to a self-directed IRA at Equity Trust for the purpose of investing in real estate?

Yes. You can choose to transfer or rollover all of, or portions of, your existing retirement accounts to Quest IRA. You can then self direct these assets into investments in which you have confidence, knowledge, and expertise.

I plan to purchase a rental property with my IRA. Does the rental income have to go back into my IRA?

Yes, all income generated by an IRA-owned property must return to your IRA. This ensures that you retain the tax-deferred or tax-free status of the investment.

How does the rental income actually get into my account?

Rental payments are sent to Quest IRA for the benefit of (FBO) your IRA. The checks or money orders are made payable to:

"Quest IRA Custodian FBO [Your Name] IRA #xxxxx."

Once received, the checks or money orders are deposited into your IRA. All checks must be sent to Equity Trust with a payment coupon.

Can my IRA invest in a newly formed entity (e.g., limited partnership, limited liability company, C corporation, land trust) that will invest in real estate?

Yes. Investments in newly-formed private entities are not prohibited under the Internal Revenue Code, with the exception of subchapter S corporations (please see IRS Letter Rulings).

Can my IRA purchase an interest in a subchapter S corporation?

No. IRAs are not qualified as investors in subchapter S corporations.

May I use funds from my IRA to renovate property in order to sell it at a higher price?

Yes. However, your IRA must pay all expenses associated with a property that it owns, including renovations. Further, all proceeds from the sale of the renovated property must be deposited into your IRA.

How do I sell a property owned by my IRA?

When you're ready to sell a property that's owned by your IRA, you need to request the original documents from the custodian. This is done by completing an investment form.

Once the property has been sold, all funds from the sale must be deposited into your IRA. These funds must be sent to your custodian with a payment coupon.

When I sell a property owned by my IRA, may I keep a portion of the proceeds and send the remaining portion to my self-directed IRA?

No. All income generated from the sale of a property owned by your IRA must be deposited directly into your IRA.

Self Directed IRA