For your convenience, we offer e-bill express if you would like to make a payment online. Thank you.

Forge Trust 3rd Quarter statements are now available online.

Forge Trust

For your convenience, we offer e-bill express if you would like to make a payment online. Thank you.

Forge Trust 3rd Quarter statements are now available online.

For your convenience, we offer e-bill express if you would like to make a payment online. Thank you.

Forge Trust 3rd Quarter statements are now available online.

Real Estate IRA

A popular investment alternative for IRA funds

Real estate is one of the most popular alternative investments chosen by self-directed IRA investors and it’s no wonder as there are many advantages.

  • Real estate is a familiar and tangible asset that can easily be evaluated as a potential IRA investment. In most cases an IRA investor can walk the property, drive through the neighborhood, obtain market data and talk to nearby property owners to determine the viability of a potential IRA real estate investment.
  • Real estate purchased through an IRA is considered a secure asset. Therefore, the investment is extended protection from personal bankruptcy filings. All transactions are conducted separately from an individual’s personal finances.
  • Capital gains and income made on property or land in an IRA are afforded tax-deferred advantages. If the investment is made through a Roth IRA, the capital gains and income are exempt from tax.
  • IRA-owned real estate assets can be handed down to future generations. These types of investments can sometimes appreciate in value. The investment, its value and tax advantages are able to spill over into the next generation under beneficiary designations.
  • Income-producing real estate investments can help turn IRA wealth into supplemental retirement income.
  • In addition to property itself, IRA funds can be used to purchase notes secured by real estate such as mortgage notes and trust deeds.

An IRA can purchase most any type of real estate

Yes, it is actually the IRA that is the buyer, not the investor. This is why your choice of IRA custodian is critical. All transactions related to the real estate investment in your IRA account must be processed through the IRA custodian on the account’s behalf.

Common real estate investment options include:

  • Homes, apartments and condominiums
  • Office buildings, retail stores, malls, and other commercial properties
  • Real Estate Investment Trusts (REITS)
  • Trust deed notes, mortgages and tax liens
  • Farmland
  • Timber, water, or mineral rights
  • New construction and development
  • Vacant land
  • Resorts and hotels
  • Investing in out-of-state or out-of-country property requires a little more due diligence on the part of the investor and greater reliance on qualified and licensed real estate professionals.

Know and understand the rules and important considerations before you invest

The general rule of any alternative investment made by an IRA is that the IRA account owner cannot personally benefit from the investment in any way. Specifically for real estate this means that:

  • The IRA account owner cannot use IRA funds to pay off a personal mortgage or use the IRA as collateral for a personal loan.
  • The IRA owner cannot use or rent the property
  • A disqualified person cannot use or rent the property. In addition to the IRA account owner, a disqualified person includes the account owner’s parents, spouse, children and their spouses in addition to any fiduciary or service provider to the account.

Investors are totally responsible for identifying, evaluating, negotiating and directing an IRA investment in real estate. A local licensed real estate professional can assist the IRA account owner in evaluating all aspects of a potential investment property.

It is important to “do the math first” to determine the total cost of ownership in year one and for recurring expenses in subsequent years of ownership. All expenses related to the IRA investment must be paid either from IRA funds or from income generated from the IRA-owned real estate investment. The IRA account owner cannot personally pay for any investment-related expense.

All income generated from the IRA investment must be paid directly to the custodian and deposited to the IRA account. For income producing property it may make sense to hire a property manager who can handle any tenant-related issues including receiving rent payments, replacing appliances or making repairs. The property manager must send net income to the IRA custodian.

Any maintenance required on the property must be taken care of by a third party.

The offer to purchase and the deed must be in the name of the custodian for the benefit of the IRA account holder.

Make sure your IRA account is opened and funded prior to making an offer as funding of an account can take several weeks to complete and personal funds may not be used for earnest money/escrow.

Leveraging an IRA funded real estate investment

Any expense related to an IRA funded real estate investment must come from IRA funds.

In those instances where adequate IRA funds are lacking, a non-recourse loan may be a consideration for funding the deal.

The loan is called “non-recourse” because it allows for no recourse against the individual account owner; only the named property owned by the IRA. In the event of a default, the only recourse for the lender is to look to the property as the sole source of repayment; the lender cannot pursue other assets that may be owned by the account owner or the IRA.

The source for a non-recourse loan is either a bank with expertise in non-recourse lending or a private lender. Investors should be aware of the fact that these lenders will have their own set of investment criteria that will need to be met.

Additionally, a non-recourse loan to finance an IRA real estate investment will trigger Unrelated Business Income Tax (UBIT) on the Unrelated Debt Financed Income (UDFI). This tax may not be a deal breaker but is important to know before you make an investment.

When considering a non-recourse loan for an IRA funded real estate investment it is important to review the lenders requirements and become familiar with UBIT on UDFI that can be found in IRS Publication 598. You should always consult with your tax professional before directing an IRA investment.

The typical loan requirements to obtain a non-recourse loan include:

  • The property must generate rental income. Lenders will often use this to determine whether there will be sufficient income to cover a loan and other expenses.
  • There must be a 60%-70% debt-to-equity ratio on the property. In some instances, an IRA is required to put 30%-40% down in order to meet this requirement.

Pooling funds for the real estate deal: tenants in common purchase

An IRA can also invest alongside other IRA or non-IRA real estate investors as a tenant in common. In this scenario the IRA’s ownership percentage must be based on the amount invested.

Let’s say an IRA invests $25,000 in a $100,000 deal. The deed to the property would indicate that the IRA has a 25% undivided tenant in common interest. Going forward, income and expenses would be pro-rated to the IRA at 25% with income and expenses flowing through the custodian.

Setting up an LLC for real estate investment

Some self-directed investors choose to set up a single-member LLC, frequently referred to as a Real Estate LLC, IRA LLC or Checkbook Control LLC. This type of IRA investment structure allows the IRA account owner to respond quickly to investment opportunities and efficiently maintain rental properties.

There are facilitators who specialize in creating this type of investment structure with costs associated for setting up and maintaining a Single Member LLC.

Doing the math first will help the IRA investor determine if establishing a single member LLC is a cost effective strategy.

Investment Document Requirements

When you are ready to make your investment purchase there are certain investment supporting documents which you are required to submit. It's important that all documentation is received simultaneously by us along with your investment authorization so as not to cause any delay in processing. Please pre-review investment document requirements here.

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