Nathan Colmer | The Van Dyk Group
C: 609.290.4293 | O: 609.492.1511
Real estate can be an excellent investment and act as a great balance to one's investment portfolio. Of course, it is best to consult your accountant and/or financial advisor to determine the best options available to you, but there are some creative ways to invest in the LBI real estate market by using an IRA.
New Direction IRA employs over 70 employees and holds close to 1.1 billion dollars in IRA assets under administration. One of the founding principles of New Direction IRA, Inc. is to bring information about self-directed IRA investing out of obscurity and into the arena of common knowledge. New Direction employs an education-based business model with the goal of making the details of self-directed IRA investing transparent and accessible.
In addition to our industry-best educational webinars, specialized videos, and cutting-edge blogs and articles, New Direction provides live presentations for investors of all asset markets, and offers continuing education courses for CPAs, attorneys, and real estate professionals. We pride ourselves in consistently being a leading provider of self-directed IRA education and administrative services. We believe in empowering our clients with the education they need to confidently make knowledgeable investment decisions for their individual retirement account.
The IRS allows an IRA, Individual 401(k), or HSA to acquire real estate as an asset without penalty and while keeping the tax benefits associated with that account type.
An IRA can purchase any type of real estate, including residential, commercial, raw land, agricultural, and more. The IRA can buy the property outright, meaning the IRA is the title holder. If the IRA does not have the full purchase price, the IRA can partner with a person, company/entity, or another IRA. It can also secure a non-recourse loan (see below) to buy real estate. This can be an attractive option when buying an investment property in the LBI real estate market.
Real estate in an IRA provides the opportunity to generate income from rent, appreciation, fixing and flipping, and more. It has been possible to participate in real estate as an asset since the inception of IRAs. The IRS requires an authorized IRA provider for all IRAs. Not all IRA providers handle real estate, but New Direction IRA does. You, the IRA holder, along with your financial professional, select the property and negotiate the terms. New Direction IRA makes sure that the paperwork substantiates that the asset is part of your IRA and, thus, deserves the tax benefits associated with the account type. It is important to remember that the Long Beach Island real estate market has a significant source of rental income. Buying an investment property with funds in your IRA and collecting the rental income can be a unique way to balance one's portfolio.
What are the Benefits of Having
Real Estate in an IRA?
Real Estate is a tangible asset and one that you can see, touch and feel.
Investment properties can potentially yield rental return as well as market
You have strategic control over the properties that your retirement account
You can buy, sell, and exchange properties without tax consequence.
Historically the LBI real estate market has seen strong market appreciation all the while being able to collect lucrative summer rental income.
Important Things to Know
An IRA is its own financial and legal entity, separate from your personal finances.
As a separate legal entity, your IRA has its own name:
New Direction IRA, Inc. FBO client name, IRA
The IRA is the owner of the real estate, not the IRA holder. Therefore, purchase and
maintenance costs are paid by the IRA and all income (e.g. rent) goes back to the
All legal documents (offer, closing documents, leases, etc.) related to an IRA-
owned asset must be in the name of the IRA, not your personal name.
Documents associated with your IRA’s real estate acquisition need to be signed by
New Direction IRA (as the administrator for that account) to be legal.
Disqualified Persons and
Neither the IRA holder nor any other Disqualified Person to that IRA may live in or
use the property.
Disqualified Persons cannot work on the property, for free or for pay.
“Sweat equity” is not allowed. Any remodeling, repair, improvement, and even
maintenance must be performed by a non-disqualified person or entity.
Your IRA cannot purchase a property from you or any Disqualified Person, nor can
your IRA sell a property to a disqualified person.
•Neither you nor a Disqualified Person can guarantee a loan for an IRA property.
Disqualified Persons are not allowed to be paid by the IRA.
Tax-deferred/Tax-free Plans Eligible for Self-Direction
1. Traditional IRA
2. Roth IRA
3. SEP IRA
4. SIMPLE IRA
5. 401(k) Plan
6. HSA – Health Savings Accounts
Hold title to Real Estate - A real estate contract is written between the IRA and the
seller. Funds from the IRA are sent to closing for the purchase and the IRA takes title
to the property directly.
Tenants-in-Common with a partner entity - This is one of the ways an IRA can
participate in a real estate asset without necessarily having the entire purchase price.
The partner can be a person (even a disqualified person), an IRA, a company, or other
Private Equity in an entity (like an LLC, LP, C-corp., etc.) that then invests in real
estate - The asset in your IRA in this case is shares of a private company or percentage
ownership in that company.
Loan money to a borrower who uses Real Estate as collateral - You can think of
your IRA as a private lender. Your IRA can lend money to non-disqualified persons
and secure the note with real estate holdings and/or other assets if you like. You and
the borrower decide on the term, collateral, and the rate.
An IRA may secure a loan to purchase property. According to the IRS, it must be a non-recourse loan (the lender is acknowledging, in the case of default, their only avenue for remuneration is the property itself). Not all lending institutions and banks offer these types of loans, but several do exist. Also, a non-recourse loan can 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). Similarly, 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 be subject to UBIT. UBIT is calculated on a form 990-T and is paid by the IRA. It does not affect the IRA holder’s personal taxes.
Step 1 – Open your self-directed IRA and fund it with a rollover, transfer, and/or
Step 2 – Work with your real estate agent to find a property.
• Make sure the offer/contract reflects the IRA as the buyer. (Purchase contracts in
the name of disqualified persons cannot be assigned to the IRA via an assignment,
• Do NOT put the contract in your name or personally pay the earnest money.
Please complete all investment documents using the following guidelines:
• BUYER / OWNER NAME:
New Direction IRA, Inc. FBO John A. Smith IRA
New Direction IRA, Inc. FBO Account No. 12345678
New Direction IRA, Inc. FBO John A Smith, IRA, Account No. 12345678
If you partner your IRA with a disqualified person/IRA/entity, you must establish the
percentage of ownership at the beginning of the investment. Those percentages will
be used to divide up the incoming revenue and pay all expenses, including earnest
• For example, the vesting would be shown as follows, assuming a 60/40 split (the
percentages can be anything from 50/50 to 99/1):
New Direction IRA, Inc. FBO John A. Smith IRA, as to an undivided 60% interest,
and John A. Smith, as to an undivided 40% interest
New Direction IRA, Inc. FBO John A. Smith IRA, as to an undivided 60% interest,
and New Direction IRA, Inc. FBO Joseph B. Smith IRA, as to an undivided 40%
Earnest money must be paid from the IRA or by a non-disqualified person who
may then be reimbursed by the IRA.
Can I buy real estate in my Retirement Plan?
Yes! The IRS has had this question so many times they answer it directly on their website
(www.irs.gov). In their retirement Q & A section they say “IRA law does not prohibit
investing in real estate but trustees are not required to offer real estate as an option”.
Therefore, to invest in real estate your IRA custodian must allow it. New Direction IRA handles
real estate and many more alternative assets.
Why haven’t I heard about real estate investment in IRAs before?
Retirement investing has been dominated by the securities industry since 1974 but real
estate has always been available to IRAs. The opportunity to invest IRA funds directly in real
estate is an option that many people are just learning about.
I have a 401(k). Can I invest that in real estate?
Your 401(k) plan may, at your direction, be invested in real estate if the investment
provisions of the plan permit it. The employer establishes the plan for the benefit of the
employees, and that employer will have language incorporated in the plan document which
states what investment options are available to the employee. If you have a 401(k) from an
employer for whom you no longer work, those funds can be rolled over to a traditional IRA
with no tax consequence. From there, you can invest in real estate.
What about borrowing? Can my IRA get a mortgage?
Yes, the IRS requires that the loan be a non-recourse loan. The lender can be a bank or a
private lender. IRA non-recourse loans tend to require a higher down payment than those for personally guaranteed loans.
What are the restrictions for the purchase?
The primary requirement is that the purchase be for investment purposes only. The IRA
owner, certain family members, and plan fiduciaries cannot use the property while the IRA
owns it. Your IRA is not allowed to buy property you already own personally.
What can I invest my IRA and qualified plans in?
There are two broad asset categories that are not allowed: life insurance and collectibles.
Beyond that, the IRS does not approve any specific investments. Usually limitations on asset
types are a result of the IRA provider’s business model, not IRS regulations.
Do I need to use a special broker and title company?
No special broker or title company are required, you can use the same ones you used to buy
your current home.
How are the expenses paid on an IRA-owned property handled?
Expenses are to be paid directly from the IRA. If the IRA owns 100% of the property it is
responsible for 100% of the expenses. If your IRA is a partner, it is responsible for its portion
of the expenses. Because the IRA must pay the expenses it is important to make sure there
are sufficient funds in the IRA to cover the expenses. When purchasing the property don’t
forget to take expenses into account.
Where does rent income go?
Rental income from the investment goes directly into the IRA.
How long must my IRA own a property before selling it?
There are no time restrictions or limitations on buying or selling a property.
Do I have to pay capital gains taxes if I sell the property?
Because the property is owned within a tax deferred (Traditional IRA) or tax free (ROTH IRA)
plan, no capital gains taxes need to be paid as long as there is no outstanding debt leverage
for 12 months prior to the sale. If there is outstanding debt leverage, UBIT may apply to the
percentage of that leverage.
Can I take property as a distribution and then live in it?
Yes, after you reach 59.5 years of age you may choose to take the property as a distribution
from your IRA. Once the property is 100% distributed, it is in your possession and you are
free to use the property as you wish.
Please keep in mind that I am a real estate agent and not a financial advisor or tax professional. The information in this section is provided by New Direction IRA and is intended to provide an example of a unique investment strategy. Please consult your accountant and/or financial advisor before making any investment. Portions of this information have been used with permission by New Direction IRA.
New Direction IRA Contact Information
1070 W Century Dr.
Louisville, CO, 80027