How to Buy Real Estate in Your IRA

Did you know you can buy real estate in your IRA? You may have heard that it’s possible but are not quite sure how it works. I’ll walk you through the three step IRA real estate investing process one step at a time. The good news is it’s simple and easy.

Step 1: Decide you need a truly self-directed IRA

First, you will need a self-directed IRA. Many people are operating under the false assumption that they have a self-directed IRA. Why is this a false assumption? If you were to call your bank or brokerage and tell them you need a self-directed IRA they would probably tell you that’s what you have. However, their definition of self-directed means you can choose from a list of limited investment options that they charge a fee or a commission on. Things like stocks, bonds, mutual funds and CD’s. If, however, you ask them if you can take title to a specific property in your IRA, what will your bank or broker tell you? “You can’t do that or you can’t do that here.” Why? Because an investment not on their approved list (approved meaning they get paid on the investment) doesn’t allow them to make money on your money. Your bank or broker will not allow you to purchase a real estate asset in your retirement account.

What makes an IRA self-directed?

The short answer is, we do. Under current IRS regulations, each IRA trustee is allowed to impose restrictions on the types of investments they hold. IRA providers cannot loosen the rules but they can restrict the rules at their firm.

Therefore, you need to choose a truly self-directed IRA provider, one that allows you to choose your own investments, whatever they might be. Specialized Trust Company is a truly self-directed IRA provider that allows you to invest in anything the government allows you to invest in. A self-directed IRA provider will typically charge an annual fee for the IRA service and does not charge commissions or take any percentage of your profits. This affords you the freedom and flexibility to select your own investments.

Most IRA providers are not self-directed so step one is to identify a truly self-directed IRA provider like Specialized Trust Company and open a SDIRA. (self-directed IRA) Once you’ve identified your new IRA provider, it only takes a few minutes to open a self-directed IRA account. Most of the process can be handled over the phone or online.

Step 2: Deposit money in your new Self-Directed IRA

Next you deposit money in your new self-directed IRA. You can do this a few different ways. First you can make a contribution. Contributions come from your earned income and you can move money from your savings or checking account and to your new self-directed IRA. Second, if you have already started a retirement account through a previous employer you can move that money into a SDIRA. You can rollover a previous employers 401(k), 403(b) or other TSP directly into your new self-directed IRA. Third, if you have an IRA already, you can transfer assets or cash from an existing IRA at your bank or brokerage to your new self-directed IRA.

When you do a rollover or transfer properly, there are no taxes or penalties associated with moving your money from one financial institution to another. Be sure to work with your new IRA provider to ensure your transfer is handled properly.

Now that you have a SDIRA set up and you have money in it, you are ready for the third and final step in the process; to make your first real estate investment.

Step 3: Direct your investments

This is the final step. You decide to make an investment, in this case, a real estate investment. If this is your first time purchasing real estate in your IRA it is always advisable to contact your IRA provider first to ask what paperwork you will need to submit. Generally there is a “Direction to Invest” form that you complete and instructs your IRA provider what you are purchasing in your IRA, how much money will be needed to purchase the real estate (along with any other acquisition costs) and where to send the money for closing.

WARNING: This is the most common mistake investors new to self-directing make

Titling, specifically proper titling, is the most common mistake investors make. One of the most important questions to answer is, “Who is purchasing the real estate?” Since you are using your SDIRA, it’s not you but your IRA who is purchasing the asset. Therefore, when you write your offer to purchase, the purchasers name should read as follows:

Specialized Trust Company FBO Your Name IRA, #12345

Your self-directed IRA provider will sign and process all of the recordable documents since it is the IRA actually purchasing the asset. When the title agency records the deed to the property it will be recorded and owned by your SDIRA. When your IRA owns the investment, all the expenses will be paid from your self-directed IRA. IRS rules do not permit you to pay expenses personally. Paying bills for your SDIRA investments is as simple as directing your self-directed IRA provider to do it. With regards to the income your SDIRA makes, here’s the best part of all – all income and profits will return to your IRA, tax protected! No income tax, no capital gains tax – no tax! By investing in a tax protected environment your wealth can grow exponentially faster than if you are paying taxes as you go.

By following these three simple steps, you will gain control over your retirement account and become an expert SDIRA real estate investor in no time at all!

About the Author

Edwin Kelly is an author, speaker, investor and CEO of Specialized Trust Company. He is considered America’s leading expert on Self-Directed IRA’s. To learn more about getting started please call 800-529-3951 or visit click here.