Real estate IRA’s have become the new buzzword in the IRA industry. Believe it or not, they’re really nothing new, they’re just finally becoming well publicized. The reason: Most IRA owners have no idea what to do with their money and some are afraid to make a decision on what to do. Remember, self-directed means exactly that; self-directed. The responsibility/burden is up to the IRA owner to make profitable investments.
So what is this idea of real estate IRAs? The simplest explanation is that IRAs can own real estate. That is; you can buy houses for all cash and you can also buy houses with debt financing in your IRA as long as you are not personally liable.
The real question begs; Should you? Most authorities or self appointed gurus suggest that investors should not own any property in their IRAs because of the liability that comes from the ownership of houses, like lawsuits. If your IRA owned property, you just exposed your entire IRA to a lawsuit. Not only that, your IRA could be subject to UBIT (Unrelated Business Income Tax). UBIT is not the worst thing in the world but there are better ways to control real estate without owning it.
Is a Real Estate IRA for You?
Before I get into the “control of real estate” let me first say that many investors put their IRA funds into LLCs and then acquire real estate. While this sounds good in practice, on information and belief the IRS will be looking into these private placement entities that are not publicly traded.
Am I trying to scare you? Heck no! I’m trying to educate you to have all the benefits of real ownership without the liability.
Here’s what we have done for ourselves and countless others:
Instead of exposing your IRA to the liabilities of ownership, you can have them be a lender and do an Equity Participation Note (EP) secured by a mortgage. This EPN can be written so that you are entitled to a percentage of the net rents and future sale of the property.
Think about it: your IRA cannot depreciate the property and there are no tax advantages available to your IRA. What you want is the cash flow and this can all be done with EPNs or Options.
Real estate IRAs? You bet! Just don’t own the houses.