Your individual retirement account (IRA) is a great way to invest in your golden years. An IRA allows you to invest in stocks, bonds and mutual funds, often in a tax-deferred setting. If you decide to invest in your future through a self-directed IRA (SDIRA), you can diversify your portfolio even more. The professionals at Royal Legal Solutions have the experience to help you avoid legal mistake that could be costly. If you decide to invest in real estate through your SDIRA, below are a few tips you may want to consider or speak with your IRA manager about.
While SDIRAs come with much higher potential gains, they do have several hoops you need to jump through first. The Internal Revenue Service (IRS) has several regulations in place to ensure your SDIRA gains are made fairly and legally. Because the IRS requires SDIRA owners to conduct their investments through a custodian or trustee, making sure you hire a professional, experienced and specialized firm is vital.
The IRS mandates that your SDIRA real estate investment cannot, in any way, have your name on it. By creating a separation of entity, the IRS prevents owners from taking advantage of real estate-related tax breaks, such as “Like Kind” exchanges and depreciation exemptions.
The IRS also dictates the types of loans you can use for your SDIRA real-estate investment. In fact, it outright limits you to the use of non-recourse loans only. Non-recourse loans are those that list only the investment property as collateral. While there is no way to recover the funds if you fail to pay on your loan repayment, a non-recourse loan protects you from the lender in the case of a default. Using a non-recourse loan means the lender cannot pursue other funds contained in your IRA or personal bank account to collect on the defaulted balance. (However, you will be unable to retain the property should you default; this makes the risks much higher if you are unable to afford the repayment sum.)
The IRS does not allow you to invest in property that you or other disqualified individuals own. Known as “self-dealing,” the IRS views this as a means of taking advantage of your real-estate investments. Disqualified individuals include your parents, siblings, and children. If you are married, it also extends to your spouse and their parents.
Creating a separation of entities and avoiding disqualified individuals are typically actions that you and your custodian can handle upfront. However, the non-recourse loans require a bit more of an understanding. When you use your SDIRA to invest in real estate, taking out a non-recourse loan means you will not be held personally responsible for repaying it. It is your IRA that must make those payments directly as it is considered the borrower instead. Non-recourse loans typically have a much higher loan-to-value ratio (50% to 70%). In the case of a default, the higher interest rates associated with this will help to ensure they recover more of their investment.
At Royal Legal Solutions, our experts have the professional experience to help you make legal decisions regarding your SDIRA. SDIRA real estate investments can be complex and involve more regulations than a typical IRA account. From avoiding accidental illegal activities to helping you find the best lender for a real estate loan, our custodians can help you make the most of these high-risk accounts.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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