Understanding How to Buy and Sell Real Estate in a Self-Directed IRA

Estimated reading time: 4 minutesLast updated on: June 18, 2021

Times are changing. The way many Americans have been taught to invest just doesn’t work anymore. With the unpredictability of traditional investing, more people have been turning to tangible assets like real estate.  Real estate investing allows people to diversify their retirement portfolios without having to deal with the uncertainty of the stock market. Being able to diversify your portfolio with tangible assets is a great way give yourself some added financial security in the future, no matter what the markets may look like. 

Real Estate in an IRA

Buying real estate in a self-directed IRA only requires a few steps. Locating the investment of your choosing is the first step. Since these accounts are self-directed, you are responsible for finding the deal. As you are looking for the perfect deal, remember to do the proper due diligence on your investment. Due diligence is extremely important to ensure you are protecting your investment as much as possible.

After finding the property you would like your self-directed IRA to purchase, you will submit investment documents and work with your self-directed IRA custodian to get your deal funded. When using a self-directed IRA to invest in real estate, it is important to understand that the self-directed IRA is the one making the actual purchase.   Although you are the one directing the IRA, the IRA itself will be the purchaser. Once all documents are signed, the funds will be sent by your custodian in the name of your IRA. 

Process of Purchasing a Real Estate Asset

Real Estate purchases with funds from a self-directed IRA differ slightly from your personal funds. Self-Directed IRAs require you to draw up the offer/contract in the name of the self-directed IRA. For example, when a Quest account is the buyer, the vesting will read: Quest Trust Company FBO [CLIENT’S FULL NAME] [IRA] # [ACCOUNT NUMBER]. Making sure the vesting is correct to show that the purchaser is the IRA will help you to protect your investment. Since your Quest IRA account is the buyer, when listing the buyer’s address on any investment documents, you would use the custodian’s address as well. 

Along with drafting up required documents, many times custodians will have their own internal forms that will need to be completed to purchase the investment, too. These forms allow the client to sign off, giving their approval for funding. After all of the documents are signed, the custodian will work with the third parties to close your real estate asset. Remember: the custodian is the legal entity in administration of your IRA, so the client will not have to attend any closings. 

Holding Real Estate in your IRA

Real estate assets in a self-directed IRA come with some responsibilities. You will want to know what to do when you are faced with property taxes or maintenance. We’ve already discussed how important it is to understand that your IRA owns the investment. In the event taxes are due or a repair is needed, the self-directed IRA will be the one that will need to pay for any expenses that are incurred. When paying for an expense, the custodian will usually require a copy of the invoice/purchase order along with a Payment Authorization Form. 

Similar to the self-directed IRA expenses, all profits and earnings must go back into your IRA. These payments must be made payable to your self-directed IRA and should NOT be deposited into your personal banking accounts. Paying for any expenses with personal money or accepting earnings back to a personal checking or savings account would be a prohibited transaction. You can learn more about prohibited transactions HERE. 

Selling Your Real Estate Investment

When you are ready to sell your real estate investment, you will also make sure to work with your custodian. All required forms will need to be completed so that the self-directed IRA can sell the property. Internal forms are typically required here, as well, along with the contract, warranty deed and final settlement statement showing details of the sale. Once completed, all profits will return to the IRA account. From here, you can continue to invest and grow your self-directed IRA for years to come. 

Investing in real estate with a self-directed IRA can be very lucrative when done correctly. Once you understand the steps to purchase property, starting is as simple as calling up a certified IRA specialist to get started. To learn more about how to get started investing with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE.

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