Every owner of an IRA or Roth IRA has to abide by the rules that are enforced by the Internal Revenue Service. These rules are designed to protect investors and to prevent misuse of retirement account funds. These statutory requirements are very strict and must be followed correctly to avoid penalties and additional rates of interest that can be charged after making a prohibited transaction. It is essential that you learn the Roth IRA real estate investment rules before attempting to invest into real estate.
Real Estate Investment Rules for Roth IRA
The current provider of your IRA might not offer real estate investments as part of the securities where investments can be made. If you are in this situation, you must transfer your IRA to a self directed IRA account with a provider that will allow you to make real estate investments. The IRA account features do not change. You simply appoint a new custodian to make the investments that you choose.
1. You Cannot Purchase Real Estate That is Owned by You or Disqualified Persons
The IRS prohibits a practice known as self-dealing for any IRA transaction. This means that you cannot buy your own property to live in nor can you buy a property for the following people:
• Parents or Grandparents
Disqualified persons do not include the following:
• Brother or Sister
• Aunts or Uncles
2. Strict Titles Must Be Used for All Real Estate Investments
To the IRS, you are separate from the investments made with your IRA. Every investment document that is used should include a title statement like:
"Name of Your Trust Company for the Benefit of [Your Name] IRA"
3. All Income Earned From IRA Real Estate Investments Must Be Deposited to Your IRA
You invest in real estate to earn a profit and this profit must be put back into your IRA. All checks received must be made payable to your IRA and not you under real estate tax rules.
4. No Direct or Indirect Benefits are Allowed with Your IRA Investments
The IRA rules regulate what is and what is not direct or indirect benefits. Retirement accounts are funded to help you in the future after you retire and not in a personal way in current times.
Examples of Direct and Indirect Benefits:
• Living in Property Owned by Your IRA
• Borrowing, Receiving or Lending Money to Disqualified Persons
• Transfer or Handling of Assets and Income for Personal Use
• Paying for Personal Goods or Services with IRA Funds
• Purchasing Stock in Companies Owned or Controlled by the IRA Owner or Disqualified Persons
• Purchasing Life Insurance
5. Profits Earned From Debt Financing Through an IRA are Taxed
A lender that offers a non-recourse loan can agree to allow you to put a down payment on real estate with your IRA. This type of arrangement will require the payment of UBIT or unrelated business income tax on form 990-T to the IRS every year. This method of IRA investing is not tax-free.
6. Any Real Estate Can Be Purchased Using Undivided Interest
You are not required to have the full amount of the purchase price available in your IRA when you are interested in making a purchase. You can benefit from a practice known as an undivided purchase to buy investment properties. This process allows you to use your IRA funds in combination with other people able to contribute IRA funds to complete the purchase price. This method is not a prohibited transaction since each partner owns a separate share of the real estate.
Conditions of Undivided Interest Investing Include:
• Property Tax, Maintenance and Other Fees are Based on Your Ownership Percentage in the Property
• Collected Rent Must Be Distributed Back to Your IRA Based on Your Ownership Percentage
• No Elements of a Prohibited Transaction Can Occur
Following All Roth IRA Real Estate Investment Rules
Knowing what you can and cannot do at all times will help you to make investments that are legal and error-free. Violating the rules of your IRA at any time can cause penalties, higher tax rates or cancellation of your self directed IRA account.
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