IRA Property Investment: How to Use IRA on Real Estate | Yieldi
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IRA Property Investment: How to Use Your IRA on Real Estate

James Crandall

August 2, 2023 · 8 min read

A Self Directed Individual Retirement Account (SDIRA) allows owners to grow tax-advantaged account balances by investing in alternative investments, such as precious metals and, yes, Real Estate. This means you can use your IRA balance to invest in real estate investments with Yieldi.

Your portfolio should always contain the appropriate balance of growth, income, and capital preservation. To decrease risk, diversification across many different investment securities is a must which is why we stress investing in bonds, stocks, and alternative investments.

Real estate is one of the best ways to build generational wealth, as it can be perfect for your long-term retirement goals.

Below, we'll walk you through everything you need to know about using your IRA balance for real estate property investments.

What Is a Self-Directed IRA (SDIRA)?

A Self-Directed Individual Retirement Account (SDIRA) is a type of retirement account that provides investors with the freedom to make a wide range of investment choices beyond traditional stocks, bonds, and mutual funds.

With an SDIRA, individuals have the flexibility to invest in alternative assets, such as real estate, precious metals, private equity, promissory notes, and more.

The key distinction of an SDIRA is the level of control and diversity it offers in crafting a personalized investment portfolio.

Benefits of Investing in Real Estate with a Self-Directed IRA (SDIRA)

Investing in real estate through a Self-Directed Individual Retirement Account (SDIRA) offers tons of benefits to savvy investors looking to grow their retirement funds through alternative avenues. Here are some of the top advantages of utilizing an SDIRA for real estate investment:

  1. Diversification: SDIRAs enable you to diversify your retirement portfolio beyond traditional stocks and bonds.
  2. Alternative Investment Opportunities: With an SDIRA, you can explore a wide spectrum of real estate opportunities, including residential properties, commercial real estate, raw land, rental properties, and fix-and-flip projects.
  3. Tax Advantages: Real estate investments within an SDIRA enjoy the same tax benefits as traditional IRAs.
  4. Control and Flexibility: You have the autonomy to choose and manage real estate assets according to your investment strategy.
  5. Potential for Higher Returns: Real estate investments can yield substantial returns over time, potentially outperforming traditional investment options.
  6. Passive Income: Rental properties acquired through an SDIRA can generate consistent rental income.
  7. Appreciation: Holding property in an SDIRA allows you to benefit from potential property value appreciation.
  8. Estate Planning: An SDIRA provides a platform for structuring your real estate holdings for effective estate planning, allowing you to pass on assets to heirs in a tax-efficient manner.
  9. Inflation Hedge: Real estate investments can serve as a hedge against inflation.

How to Invest in Real Estate with a Self-Directed IRA?

The brokerage houses that hold most IRAs and 401(k)s are not set up to allow you to make investments in Real Estate. So, to make real estate assets part of your IRA, you have to direct the company that currently holds your account to transfer the funds to an IRA trustee or custodian that handles self-directed IRAs.

What Are the Rules for Using a Self-Directed IRA to Invest in Real Estate?

Self-directed IRAs follow the same basic rules that apply to other retirement IRAs.

  • For Traditional IRAs, contributions are tax-deductible, and investment gains are tax-deferred.
  • For Roth IRAs, contributions are after-tax, but investment gains can be tax-free.
  • Because these are retirement accounts, early withdrawal could be subject to a penalty fee.

In addition to these basic guidelines, there are special rules that apply if you’re using a self-directed IRA to invest in real estate.

Special Rules for SDIRAs

  1. Real estate holdings must be titled in the name of your IRA and not you, because a self-directed IRA is considered to be a unique entity, separate from yourself.
  2. Expenses such as management and leasing fees, utilities, maintenance costs, and property taxes for property owned by the IRA must be paid using funds in the IRA.
  3. Real estate purchased by your self-directed IRA can’t be sold to the IRA by you or a related party such as certain family members or business entity you own or control.
  4. Property in your IRA can’t provide you with an ‘indirect benefit’ such as renting a single-family house held in the IRA to yourself or paying a company you own to lease and manage the real estate.
  5. Property in your self-directed IRA can be purchased using a combination of funds, which means your IRA can be used to participate in joint venture real estate opportunities or partnership investments.
  6. Income generated by real estate held in the self-directed IRA must stay within the IRA, and should be paid directly to your IRA.
  7. Net profit generated by debt financed rental property held within the IRA may need to pay UBIT (unrelated business income tax) based on the amount of leverage, because the IRS considers the income to be unrelated debt financed income (UDFI).

However, UBIT doesn’t apply to investment income. Investment income that is exempt from UBIT includes real estate rental income (the percentage that isn’t generated as a result of financing), interest income, capital gain income, and dividend and royalty income from business ownership.

Oftentimes, investors fund their self-directed IRAs using rollovers from other retirement accounts. That’s because there are annual limits for contributing to a self-directed IRA but no limitations on rollover funding.

What Is Advanta IRA?

Advanta IRA is a leader in self-directed account administration with over $1 billion in client assets and nearly twenty years of experience handling accounts that invest in real estate. The Advanta IRA Advantage is a level of service that is unmatched in its industry. Every client has a dedicated account manager who is familiar with all aspects of their account and helps them through the investing process while maintaining their self-directed IRA account details throughout the entire investing process.

If your existing IRA or old 401(k) provided does not allow direct real estate investment for your account, let Advanta IRA help you open and fund a self directed IRA that can invest with Yieldi.

Learn more about how to open an account with Advanta and invest with Yielid here.

What Are the Self-Direct IRA Pros and Cons?

It is important to weigh the pros and cons of using a self-directed IRA to invest in real estate. There are some big advantages, but are a few drawbacks to consider.

Pros of a Self-Directed IRA for Real Estate

  • Offers a way to diversify retirement savings beyond traditional financial products such as stocks, bonds, and mutual funds.
  • Invest in all different real estate asset classes, such as commercial, residential or multifamily.
  • The account’s rental income and capital gains are tax deferred which means that investment earnings can compound faster than they would if they were being taxed each time a gain was achieved.  This means your account balance can grow faster.
  • Rental income and capital gains are tax deferred with the potential to create larger returns within your IRA

Cons of a Self-Directed IRA for Real Estate

  • Due to the more illiquid natural of real estate, investors nearing the age of 72 when minimum distributions are required (RMDs) will need to decide whether to sell the property to distribute cash or to distribute the property "in kind".
  • Owning and managing property must be done properly (Advanta IRA can help with choosing a management strategy) to avoid unintended tax consequences

Real estate can be daunting for individuals who are not familiar with this asset class. However, investing in real estate using a self directed IRA allows you to use the real estate professionals that you know and trust to select a property, negotiate the deal, and to manage the property.

Open an IRA and Invest in Real Estate Properties on Yieldi

At Yieldi, we pride ourselves in our unique marketplace.

It is diverse and full of commercial and residential properties. Without the hassle of vetting properties, we do it for you using our 50-plus years of family experience in real estate development. Our online offers are asset-backed, which means your investment is backed by real assets, as opposed to more traditional stocks and bonds. 

When you invest with Yieldi:

  1. You get access to our offerings as they become available
  2. You invest your money at 9.5% interest
  3. Funds are added to your Yieldi wallet
  4. You choose the type of loan or loans you want to invest in

If you're interested in opening an IRA to invest in properties listed on Yieldi, Advanta IRA is a partner and explains the process here.

Let passive income work for you without the headache. Learn more about our current offerings here and get on your way to adding the right kind of diversity to your retirement portfolio.

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