So what are the most important things you need to know and understand so that when you find the perfect investment property, you’ll be ready to move without hesitation or missing out on the opportunity?

Game rules!

First of all, you need to understand that you are not actually buying the investment property that your IRA is buying. You must first transition your IRA to a self-directed IRA. For your IRA to purchase investments, it must go through an IRA custodian. The custodian is the company that handles all of your investment transactions and specializes in the self-direct IRA for investment real estate—in effect, they disburse all of the funds for you. and keep the title in your IRA name.

In order for the IRA to be treated as a retirement investment and protected, it must have a custodian. Under the self-directed IRA, you can’t even put $1.00 of your personal funds into the deal or you can cancel the entire program.

These are some of the biggest mistakes people should avoid!

1. Inadvertently give personal guarantees.

You, as the account owner, are considered a “Disqualified Person” and cannot provide a personal guarantee of IRA debt. To gain control of your retirement money checkbook, you will need to invest your account in a newly formed LLC that the custodian establishes. Let’s say you personally go to the bank and set up the account and the person at the bank asks if you also want a credit card, you apply and the approved card has just made a personal guarantee for your “Bad Move” IRA. The mere execution of that personal guarantee constitutes an “extension of credit” and is therefore an automatic prohibited transaction even if the guarantee is never exercised.

2. The IRA owner attempts to make a contribution to the IRA by depositing it directly into the IRA/LLC checking account rather than through the IRA custodian. In essence, if he makes an annual contribution directly rather than through the IRA custodian, he is personally interacting with your IRA/LLC. That is considered a prohibited transaction.

3. The IRA owner personally enters into a contract on the real property that he intends to purchase with the IRA funds. Many investors wait until they find property to engage the services of an IRA custodian or facilitator. Unfortunately, in doing so, they often suffer a “lost opportunity.”

A. A self-directed IRA normally takes 30 days to set up.

B. They are not allowed under the Code of Prohibited Transactions to use personal assets for the benefit of the IRA.

C. For example, suppose you find a large rental property that you would like to purchase as an IRA investment. If you haven’t yet set up a self-directed IRA, you may lose out on the deal because you don’t have immediate access to your IRA funds and you can’t personally deposit your own deposit or enter into a purchase agreement. Remember, the IRA needs to buy the property, not you.

4. They do not assume UBTI. Unrelated business taxable income applies to passive investments in a going concern. If generated, the IRA has to pay unrelated business income tax, and all bills related to the investment, it cannot use any person’s funds.

5. Self-directed IRA clients use personal property assets for the benefit of the IRA. For example, the use of a personally owned bulldozer and construction equipment to develop an IRA property would constitute a prohibited transaction. There are multiple layers of issues with this scenario, because you’re commingling business assets and you can’t use sweat capital either, it will be counted as a contribution.

6. Believe that transactions with a non-disqualified party cannot be prohibited transactions. This is a common belief that is simply not true. You, as the owner of an IRA, have a fiduciary responsibility to do whatever is in the exclusive benefit of your IRA. For example, an IRA owner could purchase rental real estate and allow a sibling and her family to occupy the property. That would not necessarily be a prohibited transaction, but it does have the potential to violate the exclusive benefit rule if the rent was not set at fair market value and the terms of the ownership agreement were not enforced. The problem here is that as a landlord you have to evict tenants just like anyone else and renting to a family member could be a conflict of interest.

7. The attempt by the self-directed IRA owner to take a real estate commission on property purchased/sold by the IRA. If the IRA owner is a real estate agent, he cannot receive a commission on the purchase or sale of his IRA property. He cannot receive personal compensation from any self-directed IRA investment.

8. The self-directed IRA enters into a de facto partnership where you lend money to a developer and, instead of making an attached loan with interest and payments, take a portion of the profits. Although this is allowed, it is a de facto partnership that will generate Unrelated Business Taxable Income (UBTI). This would not be a problem if the IRA lent the money at an interest rate that the market supports with a set monthly payment schedule.

9. Two self-directed IRA owners participate in a quid pro quo partnership to use their own retirement funds. For example, let’s say each person has $200,000 in a self-directed IRA. They then each make a loan to the other for $200,000 to make personal investments. These loans depend on the other person lending the money and could be seen as the use of one’s retirement funds for personal benefit.

10. Self-directed IRA holders try to “disguise” active investments that can earn UBTI. Some self-directed account holders will place an ad in the newspaper to purportedly show their intention to rent an IRA investment property, but “conveniently” can’t find the right tenants, so they use this as an excuse to sell it. Even if it were true that the IRA owner originally intended to rent the property rather than turn around and sell it, case law says that the most dominant factor is the purpose at the time of sale, not at the time of sale. the initial purchase. . This type may make this transaction subject to UBTI.

The fact is that a self-directed IRA can be exciting, safe and profitable, there are so many investment opportunities allowed, but if you’re thinking about how you could be doing this type of investment, make sure you have the right people making sure you don’t commit mistakes that in the end can be very expensive.

To learn more about Real Estate IRAs, you’ll need a professional who understands how the program works before you even start looking at real estate.

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