Putting real estate in your IRA can be a good way to earn a solid return that you can keep your eye on, but the mechanics of buying, holding, transferring and selling real estate in an IRA can vary depending on your self-directed IRA custodian. A typical process of buying real estate through a self-directed IRA custodian is to go through the following steps:
Buying Real Estate in an IRA
1. Identify an investment property and make an offer as your custodian CFBO your name (as the buyer)
2. Have a third party (i.e. attorney, title company, realtor) draft purchase documents for your custodian to sign
3. Fill out a form directing your self-directed IRA custodian to pay the third party for their fees
4. Make sure the contract is between your custodian CFBO your name and the seller
5. Submit the following documents to your self-directed IRA custodian
– Purchase agreement
– Settlement agreement
– Escrow instructions
– Copy of the preliminary (un-recorded) deed
– Custodian form to make an investment for your IRA (i.e. investment authorization, directive)
Once you have gone through these steps your self-directed IRA custodian will sign the necessary documents and forward the funds to escrow in accordance with your instructions.
Holding Real Estate in an IRA
After purchasing real estate as an IRA investment you will need to keep maintenance transactions at an arms length. This means:
• Don’t pay for expenses or repairs out of your own pocket
• Don’t collect and deposit income into your personal account
• Don’t personally perform work on the property
• Don’t put utilities, insurance, etc… in your personal name
• Don’t utilize the property for personal use or personal benefit
Instead…
• Instruct the IRA Custodian to pay for expenses out of your IRA
• Instruct the payee (tenant, buyer, etc..) to send a check directly to the IRA
• Hire a third party to perform repairs or maintenance on the property
• Keep utilities, insurance, etc… in the name of your IRA or third party
Real Estate IRA Transfers
If you decide to switch IRA custodians while still holding real estate in an IRA the transfer process will be a bit more involved than a typical in-kind transfer with publicly traded securities.
First you must initiate an in-kind transfer from your new self-directed IRA custodian instructing them to initiate a trustee to trustee transfer for the real estate in your IRA.
The new IRA custodian will contact your existing custodian by sending the transfer form with a signature guarantee.
Once your custodian processes the transfer request they will send an assignment of interest assigning the property to the receiving custodian.
During this process there may be a period of time where neither custodian accepts liability for the real estate in your IRA.
The receiving custodian will draft a letter instructing you to hire a third party (attorney, title company, etc..) to draft new deeds titling the property under the new IRA custodian.
You may need to submit instructions to the custodian to pay the third party fees. The custodian may also charge you a fee to make this payment.
Once the deeds have been completed, you or a third party will need to take them to the county clerk to get recorded.
Once the transfer process is completed you can instruct any tenants to make checks payable to the new IRA custodian.
Thinking ahead
Selling IRA Real Estate
There is a lot of talk about buying real estate in an IRA but what about selling it? If selling real estate isn’t tedious enough outside of an IRA, doing it in a self-directed custodial account will add some additional leg work and rules. Much like buying real estate in an IRA, selling it through a self-directed IRA custodian will require the hiring of third parties, getting your IRA custodian to sign off on contracts and deeds and paying nickel and dime fees for everything you do.
Flexibility and Checkbook Control
The beauty of real estate investing is there are many angles and strategies to take. You may find a bigger margin in negotiating with banks who are preparing to foreclose on property, buying real estate at tax or estate sales or exercising real estate option contracts. Most profit is made when you buy real estate, not when you sell it, so the ability to act quickly is key. Unfortunately most self-directed IRAs will only add paperwork and restrictions that will ultimately slow you down, not offer flexibility. If you are holding real estate in an IRA custodian then you do not have true checkbook control or the flexibility to jump on opportunities as soon as they arrive, leaving you with investment opportunities that competing investors didn’t want.
IRA Separation and Protection
Separating your IRA from other IRAs under the same custodian is simply done by adding CFBO (custodian for the benefit of) your name after your self-directed IRA custodians’ name. Although this sounds like a rock solid method of separating thousands of IRA investors from each other (sarcasm alert), in reality it is not. Imagine that you have a self-directed IRA at XYZ custodian who has 50,000 other clients and growing. If one IRA investor buys a property in Travis county TX (or wherever) and lets that property go by not paying the property taxes, the county won’t recognize the CFBO you want to buy a tax deed. All they will know is that XYZ Trust company owes property taxes and they won’t allow your IRA to be an investor at tax sales. You can hire a lawyer to explain but it may not make a difference to the county.
This is just one scenario where it would be wise to separate your IRA from other IRAs at the same custodian. There are countless other scenarios that could pose the same problem. For example, self-directed IRAs that have nothing to do with you may be involved in active law suits, bank foreclosures, late on insurance payments or property taxes, etc…
The New Standard IRA
If the process of holding real estate in an IRA seems too cumbersome or if some of the issues with holding real estate through an IRA custodian aren’t feasible – there is a solution! A self-directed IRA LLC will allow you to make real estate investments just as if you were investing with your own LLC. Investors all over the country are using limited liability companies to hold their investments for asset protection purposes and therefore, banks, counties, title companies, etc… are all familiar and comfortable in dealings with limited liability companies.
– Self-Directed IRA LLC
A self-directed IRA LLC is a vehicle that circumvents the many problems with holding real estate through a self-directed IRA custodian. Making investments under a limited liability company rather than through a custodian will give you added security, flexibility and simplicity. With a self-directed IRA LLC, instead of holding real estate through your IRA custodian, you are holding a limited liability company. Under the self-directed IRA LLC is where you will make your real estate IRA transactions. For more information on how to get checkbook control through the use of a self-directed IRA LLC click here.
