Investing in Real Estate Through a Self-directed IRA
SHOULD YOU INVEST IN THIS MARKET?
Every recession produces an inevitable buyer’s market when equity and property values bottom,
and until credit access expands. In that market, cash-rich and credit-worthy investors will have
many opportunities for above-average returns with smart purchases of distressed assets.
Investors should consider whether, after the recent drop in property values, the real estate
market is poised to solidify and rebound sharply.
SELF-DIRECTED IRAs
The benefit of using an Individual Retirement Account (IRA) to defer taxation of earned income is
well known. Because pre-tax income is invested and earnings compound tax free, long-term
gains are significantly higher. Taxes are levied when IRA funds are withdrawn from the account
– in theory, this occurs in one’s retirement years, when income levels are lower, with the result
that a lower tax bracket applies.
Your IRA is, in effect, a legal entity, registered with the IRS and under the control of the account
custodian – the IRS-qualified financial institution in which the IRA is deposited. Whether you
direct its investment into stocks, CDs, or real estate, it is the account custodian that executes
the transaction, and it is in the name of the IRA account that acquired assets are registered.
The account custodian has fiduciary responsibilities to the owner of the IRA and to the IRS.
Every IRA is essentially self-directed, in that you direct funds to the qualified account custodian,
typically a bank or brokerage, and then direct its use to purchase one or more of the investment
options those institutions offer. However, the IRS allows retirement funds to be invested in
more than just the certificates of deposit (CDs) and stocks that banks and brokerages sell.
With a few exceptions, such as life insurance, collectibles, and S corporations, IRAs can be
invested in almost anything. In reality, because qualified account custodians are not available
for all investment types, there are practical limits.
“Self-directed IRA” is an industry term for an IRA deposited with an account custodian (trust
company) offering more flexible investment options, the most popular being real estate and
equity assets...