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Purchasing Real Estate Through An IRA | Stephanie Parker

During these current economic conditions, many people are reviewing their retirement planning options and are looking for creative opportunities to plan for the future. A unique option, that most people are not aware of, is the ability to invest in real estate through your IRA account. These transactions are strictly regulated but also have many advantages.

Real estate purchases can be used to grow your IRA
You must purchase properties or land that will help grow your IRA account through rental proceeds or other earnings. The most common types of IRA real estate are farmland, timberland and rental properties. With a farmland purchase, you can increase your IRA account through the money made from your yearly harvest. The proceeds from that harvest go directly into your IRA account as income and are tax deferred until you actually withdraw the funds from the account. Purchasing rental properties, such as storage facilities or even a rental home, also qualify because you are generating earnings that exclusively fund your IRA account.

Not for your personal use
The property within your IRA cannot be used for personal use by yourself, spouse, ancestors, descendants or their spouses. You cannot use your IRA real estate for personal gain. For example, you cannot purchase a rental property and then you and/or a family member reside in or use the property.

Titling
The purchase of the property must be done with the IRA funds and all property has to be titled in the name of your custodian, i.e. Delta Trust & Bank as custodian for your IRA. With proper titling of the property it is clear that the property is owned by the IRA and held with a custodian.

What happens to the property when you retire
Most people at retirement sell the property and the proceeds of the sale are deposited into the IRA for use. As an alternative, you can take a distribution of the property at retirement and pay taxes on the value of the property at the time of distribution. The government encourages growth in your IRA by not taxing your IRA growth while you prepare for retirement; however, when you reach age 70 ½ you are required to begin taking distributions out of your IRA. All distribution out of your IRA are income taxable to you as ordinary income.

The details
Your IRA custodian will require you to provide annual valuations on the IRA property and insurance whether it is liability or replacement. Also, all expenses and income pertaining to the properties must flow through the IRA account. If expenses are paid by the account owner, a reimbursement would be considered an IRA distribution and would be income taxable as ordinary income.

Opportunities & Resources
Most qualified 401(k)s, 403(b)s and other plans provide an opportunity to transfer your qualified retirement account directly into an IRA without incurring distribution income taxes. If you own a qualified retirement account, you should consider the opportunity to transfer it directly into an IRA to provide more investment variety, and there are other benefits for the inheritance of an IRA compared to most other qualified retirement plans. If interested, I would encourage everyone to read IRA Wealth, Revolutionary IRA Strategies for Real Estate Investment by Patrick Rice and Life and Death Planning for Retirement Benefits by Natalie Choate.

Rules & Regulations
You will need to consider the strict IRA and FDIC guidelines that govern these accounts. Refer to IRS Publication 590 to view what is considered a disqualified person and to also see what types of transactions are prohibited. Publication 590 will also provide valuable information with regards to other concerns you may have with your IRA. It is also recommended that you consult with your tax advisor or CPA to determine if you can withstand the risk given the fluctuations in the real estate market. Based on the type of rental property you have, you need to consult with your CPA to determine if you will fall under the UBTI (Unrelated Business Taxable Income).

The trust department at Delta Trust is one of the few companies that will consider custody of IRA accounts owning real estate. I will be happy to discuss the options you are considering and wish you every success as you make decisions about the investment of your qualified retirement accounts including your IRA.

Click here to watch Stephanie discuss this topic with Today’s THV.

Stephanie Parker
IRA Administrator/Trust Operations Manager
Delta Trust & Bank

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