Using IRA to Buy Investment Properties
With taxes going up for most people, it is best to take advantage to reduce taxes like IRA. You might also invest in real estate, to make the most out of cash flow and property appreciation. Therefore, converting your IRA to a self directed IRA will reduce your taxes and help you earn money from real estate.
To avoid confusion, here are the things to consider according to Forbes Magazine.
Type of Properties
The real estate you buy must be a business property, not a personal residence, second home or occasional rental.
If you wanted to buy a rental property, you would open an IRA custodial account, transfer cash from an existing IRA account — or possibly 401(k) — into the custodial account and then purchase real estate under the IRA account name.
You can also buy and sell real estate in a self-directed IRA if you are in the flipping business, but there are limits on how many you can do per year. The profits on any transaction would be tax-deferred or tax-free and allow your IRA to continue to grow with those tax advantages.
You can’t get a traditional mortgage loan in an IRA, so you really need to have enough money in your IRA to purchase properties for cash if you plan on having the property as a long-term rental. There are also costs to administering the IRA, so factor those into your calculations when penciling out any real estate investment. And you cannot write off losses or depreciation from any investment property in an IRA, so there won’t be the traditional tax savings you’d get on rental properties. Lastly, if you fail to comply with any of the rules, it may kill your IRA and cause you many tax penalties.
Don’t put all of your IRA eggs into one basket. It would be smart to talk to a financial adviser on how to allocate all your investment savings into different assets, based on your age and risk tolerance.
If you want to use your IRA to buy real estate, you need to understand what you can and can’t do.
Before investing your Self-Directed IRA to Real Estate, you should follow a few simple guidelines:
· Learn more about the IRS Publication 590
· Make sure that your custodian is a licensed non-bank custodian
· Check the length of time the custodian has been in business
· Check the custodian’s license to do business in the state where you want to invest your IRA
· Ask for your custodian’s past financial statement
· Confirm with the state’s Attorney General where your custodian is listed to see if there has been complaints filed against your custodian
Do your own research and do not blindly assume that everything you are told by a custodian is true. It is the wisest thing to do before you put your hard earned IRA to an investment.
Considering an IRA LLC will almost give you a complete control over your retirement investments. It is important to understand how this type of LLC works so you will be able to know how to fit into the equation, without falling in any prohibited transaction trap.
Basically, an IRA LLC is a special type of LLC that handles all kinds of retirement plans including IRA and self directed IRA.
An IRA LLC will help reduce your fees, processing delays, title issues, and general paperwork. An LLC is respected as a corporation. However, it has limited liability purposes. LLC doesn’t pay income taxes, the members of the LLC pay for their taxes instead.
When it comes to self-directed IRA, there would be no federal income tax applied to any income generated by the IRA LLC. With that being said, the LLC is the most common type of entity used in making retirement investments.[/section ]