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FREQUENTLY ASKED QUESTIONS
Can I buy real estate with my self directed IRA?
Yes, contrary to what you may have heard or been told, the IRS places very few limits on what you may buy with your self directed IRA funds.
Where do I find investment properties?
It’s up to you and your real estate broker to find the property. There are no limitations or restrictions other than the property cannot be something you or any disqualified person currently own.
Can my IRA purchase real estate I already own?
No. This would be considered a prohibited transaction. You may not purchase real estate currently owned by you or any other disqualified person.
If I buy an income producing rental property, who gets the rental income?
The income goes back into the self directed IRA and you retain the tax deferred or tax free status (in the case of the Roth IRA) of the investment.
Can I use personal funds to co-invest with my self directed IRA?
It is not a prohibited transaction for you to co-invest, however, there are certain formalities that need to be followed and there are some situations where it isn’t advised.
Can my self directed IRA co-invest with friends?
Yes, IRAs may purchase an undivided (and proportionate) interest in real estate.
Can I be the property manager of the real estate?
It depends on which type of self directed IRA you have. If it is other than a Checkbook LLC the answer is no. In fact you can’t even change a light bulb. If you have a Checkbook LLC you can be the property manager, collect the rent, choose the tenants and pay the bills.
Can my self directed IRA get a mortgage?
Yes, you can leverage your IRA funds in order to finance real estate. The loan must be non-recourse and many lenders do not handle those types of loans. Please see our section on How Do I Pay for Properties for more information.
May I use my self directed IRA funds to make improvements or renovations?
Yes, in fact you MUST use self directed IRA funds to make all improvements and pay all expenses associated with the property. Failure to do so will result in extreme tax consequences.
How are the expenses paid?
Expenses are to be paid directly from the self directed IRA. If the self directed IRA owns 100% of the property then it is responsible for 100% of the expenses; if it owns less then it is responsible for the same percentage of expenses as the percentage of the property owned. Because the self directed IRA must pay the expenses it is important to make sure there are sufficient funds in the self directed IRA to cover the expenses. When purchasing the property don’t forget to take expenses into account.
Can I buy vacation property?
Yes, you can purchase vacation property with your self directed IRA, but YOU cannot vacation there.
How long must my self directed IRA own a property before selling it?
There are no time restrictions or limitations on buying or selling a property. You could choose to sell a property the day after closing.
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 are owed.
Can I purchase my retirement home with self directed IRA funds?
Yes, your self directed IRA would be the original owner and would make the purchase and maintain the property. It could then be rented out until you reach retirement age. At that time the property could be deeded to you as a distribution. You would have to pay taxes at that point but without penalty.
Can my self directed IRA make loans to other individuals who want to buy real estate?
Yes, as long as they aren’t “disqualified persons”. This is a great investment for your self directed IRA because the property is the collateral.
Can I make a loan to my brother, aunt, cousin or stepchild so that they can use the money as a down payment on a home?
Yes, because none of these persons are “disqualified persons” under the IRS Code.
Can my self directed IRA make loans to a friend?
Of course. Friends are not “disqualified persons” under the IRS Code so the self directed IRA can make loans to them for any purpose whatsoever (boat, hot tub, home improvements, etc). Of course, you will want to make sure there are proper terms and formalities since this is your retirement.
Can my self directed IRA make loans to a real estate developer?
Yes, your self directed IRA can loan money to finance the purchase of property or the development of property. Developers often look for private financing and often pay an above market interest rate.
Can my self directed IRA make loans to businesses or companies?
Yes, so long as you or any other disqualified person does not have over a 50% interest in the business. For example, if you and your brother had a company and you owned 49.5% then your self directed IRA could buy, sell or loan to it without penalty.
Can I buy a business with my self directed IRA?
Yes, you can buy a business.
Can I invest in an existing business?
Yes, this can be done as the purchase of stock as a loan to the business.
What about S-Corporations?
S-Corporations do not allow self directed IRAs as investors; they only allow individuals as investors. So S-corporations do not permit have an IRA as a shareholder.
I have a 401(k) with an old employer. Can I move it into a self directed IRA?
Yes, you can move this money into a self directed IRA and start controlling this money yourself rather than letting your old employer control your future.
I have a 401(k) with a current employer. Can I move it into a self directed IRA?
The 401(k) plan documents will specify what you can do, but most of the time you cannot move money from a 401(k) plan if you are currently working for the company.
I have several IRAs and old 401(k) s. Can I combine them?
Yes, they can all be combined and then invested into your self directed IRA so that your buying power is maximized. The only restriction on 401(k)’s is that you generally must no longer work for the employer. In the event they cannot be combined, such as a traditional IRA and a Roth IRA, they can still be invested into the same Checkbook LLC.
Are the gains that my self directed IRA makes taxable?
Not usually. If a self directed IRA buys a piece of property and then sells it at a profit, the gains stay within the IRA. If you have a traditional IRA the gains are tax deferred. If you have a Roth IRA the gains are tax free. Note, you alter that result if you use leverage through borrowing, if you borrow 1/3 of the money then 1/3 of the profits are taxed.
Can I invest outside of my state or outside the country?
Yes, your self directed IRA can invest outside the country. There are many great investment opportunities outside the US.
Does it matter where the self directed IRA custodian is located?
The custodian can be anywhere because it is the IRA that is doing the investment. If you are using a Checkbook LLC the IRA has only one investment – the LLC.
What are prohibited transactions?
Prohibited transactions are those transactions that violate the basic intent of the self directed IRA. Your self directed IRA must benefit rather than benefiting you personally. In other words, there can be no “self dealing” transactions. Generally, prohibited transactions involve one of the following:
- Doing business with a disqualified person;
- Benefiting someone other than the IRA;
- Loaning money to a disqualified person; or
- Investing in a prohibited investment.
Who is a disqualified person?
- The self directed IRA holder and his or her spouse;
- The self directed IRA holders ancestors, lineal descendants and their spouses;
- Investment advisors and managers
- Any corporation, partnership, trust or estate in which a disqualified person has a 50% or greater interest, and
- Anyone providing services to the self directed IRA such as a trustee or custodian.
What are some types and examples of prohibited transactions and/or self-dealing transactions?
- Self dealing with a family member (your self directed IRA purchases a home from your mother)
- Self dealing with yourself (you self directed IRA purchases a home from yourself)
- Personal use of a self directed IRA property (buying a vacation home with self directed IRA money and then staying in the home when on vacation)
- Receiving personal benefit from your IRA (paying yourself for work that you do on the property such a repairing the roof)
What is an exemption?
Exemptions are permission to invest in something or in some way that is technically a prohibited transaction. For example, it is a prohibited transaction to rent property owned by your self directed IRA to your child. An exemption would allow you to do so.
What is a UBIT?
Unrelated Business Tax Income applies to debt financed property in self directed IRAs and also applies to operating income received from companies owned by IRAs and qualified plans. Typically the tax is owed on the income from the property in the same percentage as is financed. If you finance 80% of the property, then 80% of the income from the property is taxable.
What happens if I have to withdraw funds from my plan for an emergency?
Borrowing funds from a plan for an emergency prior to your reaching age 59 ½ may be done without a 10% penalty if the emergency is in compliance with hardship withdrawal rules noted in the IRS code. You may withdraw funds from your self directed IRA provided you repay the funds within 60 days of distribution.
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