Purchasing real estate using SDIRA is growing in popularity, despite it being the lesser known of the IRA options. In order to open one, an owner must hire a trustee to be responsible for holding the assets, administering the account, and filing the required IRS documents.
Like other IRA accounts, owners have the freedom to invest in stocks, bonds, and mutual funds; as well as storage units, small businesses, parking lots, and land. Because of the numerous options, owning real estate can be very fruitful. However, like any other financial investment, using SDIRA spend in real estate requires caution and planning. The following tips are designed to keep you informed and safe.
Refrain from self-dealing.
There is a law that prohibits IRA owners from creating investments that benefit themselves or family members. It is also illegal to intermingle your IRA and nonretirement funds. For example, if you wish to put a down payment on your IRA invested building, you must first transfer funds to a trustee. Then, the trustee will write a check to the seller.
UDFI tax.
If you receive a mortgage as part of the real estate purchase, you will be required to pay taxes on any income traceable to the financed part of the transaction. This is known as the Unrelated Debt Financed Income (UDFI). If cash is used to purchase your invested real estate, then the income generated by the property, along with the gain from future sale of the property, will be tax deferred until you start taking distributions.
You cannot reap the benefits of the IRA investments until you retire.
You may not use the funds to pay off your own mortgage or bills. Nor may you use the property you buy as an investment in the SDIRA.
If you break any of these laws, the IRS will view the IRA funds used as a distribution of your IRA. You will be taxed on the funds, with interest and penalties included. That’s why it’s recommended to seek legal advice before investing your SDIRA into real estate.