IRA Source - FAQs

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IRA Source Answers Your Questions

What’s an IRA?

IRA stands for Individual Retirement Accounts. IRAs are a tax sheltered retirement plan that was created by the ERISA Act in 1974. IRAs are for people to arrange for their retirements. There are different types of IRA accounts and the IRS has contributed some rules to how IRAs can be handled dealing with contribution limits on an annual basis, withdrawing conditions, tax rates and terms.

What is ERISA?

ERISA is the Employment Retirement Income Security Act, that was done in 1974 that governs employee benefit plans that are insured or sponsored by employers.

What’s a Self-Directed IRA?

The term self-directed is a term used in the industry, it is not a legal term or a different type of IRA. The term does mean that the IRA is placed with someone who performs transactions only as directed by the account holder.

What is an IRA LLC?

An IRA LLC is a limited liability company that is owned by your self directed IRA and managed by you personally, thereby, giving you full checkbook control of your IRA and 401k

IS An IRA LLC Legal?

Yes, an IRA LLC is legal. In fact in 1996 the Swanson vs Commissioner case cleared up any doubts that anybody had about this issue. In this case the court rejected the IRS position that the business structure constituted a prohibited transaction. The IRS was so wrong that the judge had the IRS refund over $50,000 in legal fees to MR. Swanson.

 

How do I use my IRA to buy real estate?

You can transfer your existing IRA or roll over your pension plan to a custodian and then find a property you wish to invest in. You instruct the custodian to make the purchase—the real estate that you purchase shows up in your IRA portfolio.

What types of real estate investments can a self-directed IRA make?

Here are a few examples of the types of investments you can make with your IRA:

• Commercial properties

• Rental homes for investment

• Land

• TIC-fractional ownership

• Foreign properties

• Joint ventures

• Ground leases

• Notes

• Deeds

• Farm land

• Water rights

• Marinas

• Funds

• LLCs

• REITs

• Development

• Contracts

• Tax Lien certificates

What are the rules of a Self Directed IRA?

The IRS has defined the following assets prohibited and excluded from Self directed IRAs:

• Contracts of life insurance

• Collectibles

• Capital stock in an ‘S’ corporation

Here are some examples of prohibited transactions:

• Coins other than US gold coins

• Stamps

• Card collections

• Artwork

• Rugs

• Metals

• Gems

• Antiques

Can my IRA get a Mortgage?

Yes, your IRA can get a non-recourse mortgage. As a client of IRA Source,LLC, you will have access to multiple sources of lenders and banks that specialize in making loans to your Self Directed IRA.

Is there a difference between owning real estate personally versus inside a self directed IRA?

Yes there is. The title must be held by the IRA and you can’t be on the chain of the title. All of the documents must be executed by the custodian of your IRA on your behalf, also, you can not enter into a contract and then assign it to the IRA. You can not personally manage the real estate other than basic administrative functions such as directing the custodian—you can’t work on or perform any labor on the real estate. The custodian must also send the funds right from your IRA. You can not pay any expenses or receive any income from the real estate transaction.

Is the income from real estate investments made by my self directed IRA taxable?

If the transaction was done in cash, then there is no tax due. The income stays inside the IRA and also isn’t taxed. If the investment was financed in whole or in part, then the financed portion is subject to tax on both income and gain on sale.

I want to change the beneficiary of my IRA, can I do that?

Yes you can. The owner of the IRA can elect to change the beneficiary when circumstances change. Also, an advisor will be able to remind the owner that if the beneficiary dies, another must be selected.

I purchased a rental property that provides income, does the income have to go to my IRA?

Yes, it does.

This sounds like it might be illegal—is it? Why haven’t I heard of this before?

No – it is not illegal. Investing in real estate with your IRA has been allowed since 1974. Many people are unaware that you can purchase real estate with your IRA. There are some transactions that are illegal to use your IRA for, but real estate is not one of them.

My IRA custodian doesn’t permit investments in real estate. Why not?

It is likely simply because real estate investments aren’t part of their business model and they aren’t set up to handle these individualized transactions that can’t be completed instantaneously. They may also not have the staff to handle transactions that take longer than instant electronic trades.

What happens if I make a prohibited transaction?

If you make a prohibited transaction, the IRA will be liquidated and the taxes and penalties are paid on the assets that were held on the first day of the year in which the prohibited transaction took place.

There are plenty of options for you with a self-directed IRA—many people are confused when it comes to the capabilities and restrictions on their IRA accounts but a qualified professional and some good advice can get you, and your self-directed IRA moving in the right direction.