How do I purchase Real Estate with my IRA?

Investing in real estate through a Self-Directed IRA (SDIRA) can provide significant benefits, including diversification and long-term wealth building. If you're looking to purchase real estate using your IRA, it’s essential to understand the process, requirements, and compliance rules that govern these types of investments. This article outlines how to purchase real estate through your SDIRA and provides step-by-step guidance for a smooth transaction.

What is Real Estate in a Self-Directed IRA?

Real estate in a Self-Directed IRA refers to property purchased primarily for investment purposes—whether for rental income or future appreciation. As an SDIRA holder, you are prohibited from residing in properties held within the IRA. The real estate must be considered an investment, and any rental income or proceeds from the sale are for the benefit of the IRA.

Eligible Real Estate Investments Include:

• Residential Properties: Single-family homes, multi-family units, vacation rentals.
• Commercial Properties: Office buildings, retail stores, warehouses, industrial properties.
• Raw Land: Undeveloped land that may be developed or sold in the future.

It’s important to note that properties must be used exclusively as investments, and you must comply with IRS rules governing transactions involving your IRA.

Key Compliance Rules for Real Estate Investments in SDIRAs

• Non-Occupancy Rule: You, as the IRA holder, cannot live in or personally benefit from properties owned by your SDIRA.
• Rental Income and Expenses: Any rental income earned is considered tax-deferred and must be reported accordingly. Expenses related to the property, such as maintenance, repairs, and management fees, may be deducted from the rental income.
• Capital Gains Tax: If you sell the property at a profit, the gains may be subject to capital gains tax. However, as long as the property remains within the SDIRA, the sale is tax-deferred until distributions are taken.

AET Requirements for Real Estate Investments

Before purchasing real estate with your SDIRA, you should be aware of AET’s specific guidelines and requirements for real estate transactions:

• Minimum Balance Requirement: You must maintain a minimum balance equal to 10% of the total value of all real estate assets held in your SDIRA.
• Restricted Areas: AET does not allow real estate investments in certain areas, including:
  • South Carolina
  • New York
  • Cook County, IL (Chicago)
  • Florida
  • Georgia
  • Maryland

Steps to Purchase Real Estate Using Your SDIRA

Purchasing real estate through your SDIRA involves several key steps to ensure compliance with IRS regulations. The process is streamlined through the use of a Direction of Investment (DOI).

Step 1: Identify and Evaluate the Property

Conduct due diligence before purchasing any property. This includes market research, property inspections, and financial analysis. Consult with real estate professionals (agents, brokers, inspectors, etc.) to ensure the property fits your investment goals.

Step 2: Obtain a Purchase Agreement

Once you've identified a property, the next step is to obtain a Purchase Agreement. This agreement will specify that the buyer is your SDIRA, which will be titled as the legal owner of the property.

IMPORTANT: The real estate purchase agreement must be titled under the name of the IRA, not the account holder. The proper titling must read:
“Client Name, legal owner via non-trust custodial IRA with AET.” This is a common issue that can delay the process if not followed correctly. Any documents submitted with incorrect titling will result in the DOI being placed On Hold for Corrections, which will delay the approval and processing of your real estate purchase.

Step 3: Submit Documents to AET

To proceed with the purchase, submit the following documents to AET for review and approval:

• Purchase Agreement/Contract: Includes the legal title under the SDIRA’s name and the agreed-upon terms (earnest money deposit, sales price, etc.). Ensure that the titling is correct and reads as noted above.
• Settlement Statement (HUD or Closing Documents): This document is required to finalize the purchase (not needed for the earnest money deposit).
• Hold Harmless Agreements: Both the buyer and seller should sign hold harmless agreements that indemnify both parties from liabilities.

Step 4: Complete Due Diligence and Inspections

Before authorizing the purchase, you must conduct necessary inspections, appraisals, and environmental assessments. These activities ensure the property meets your investment criteria and is in good condition.

Step 5: Authorize the Purchase

Once due diligence is complete, submit the Real Estate Purchase Authorization Form to AET. This form officially authorizes the transaction and begins the fund transfer process.

Step 6: AET Processes the Purchase

AET will process the funds from your SDIRA to the seller or escrow account (depending on the payment structure). The property title will then be transferred to the SDIRA. AET will ensure all funds are properly disbursed and the transaction complies with IRS regulations.

Step 7: Manage the Property

Once the property is owned by your SDIRA, you must manage it according to IRS guidelines. This includes handling rental income, property maintenance, and ensuring that you avoid prohibited transactions with disqualified persons (family members, for example). Annual reporting of the property’s Fair Market Value (FMV) is also required for IRS reporting.

Step 8: Compliance and Reporting

• FMV Reporting: As the owner of real estate through your SDIRA, you must report the property’s FMV annually to AET.
• Prohibited Transactions: Ensure no transactions occur with disqualified persons, as this could jeopardize the tax-advantaged status of your SDIRA.

Payment Structure for Real Estate Purchases

There are two primary payment structures when purchasing real estate with your SDIRA:

1. One Payment Process: The full purchase amount is paid in a single transaction.
2. Two Payment Process: In some cases, the purchase may be split into two payments: an initial Earnest Money Deposit (EMD) and the balance at closing. For the two-payment process, two separate DOIs are required.

Additional Considerations for Real Estate Purchases

• Escrow Transactions: Typically, funds are sent to an escrow account rather than directly to the seller. Ensure the contract reflects this.
• Address Check: Make sure that AET’s address is not used in the purchase agreement. The SDIRA should be the sole owner of the property, and its address must be used in any documents.
• Personal Guarantees: Personal guarantees are strictly prohibited in SDIRA real estate transactions. This includes guaranteeing any loans or other liabilities personally.

Conclusion

Purchasing real estate through an SDIRA offers significant benefits, but it's crucial to follow the correct procedures and comply with all IRS rules. By working closely with your Advisor and adhering to AET's guidelines, you can effectively invest in real estate within your SDIRA, potentially diversifying your retirement portfolio and creating long-term wealth.

Remember, always ensure that all documentation related to the property purchase is properly titled under the SDIRA to avoid delays and complications. If you have any questions regarding the real estate purchase process, please reach out to AET’s Support Department for assistance. They are here to help guide you through the process and ensure compliance with all necessary regulations.