What Makes a Real Estate IRA Different Than Other Self-Directed IRAs

In this episode of our ongoing blogcast series, David Moore compares a real estate IRA to other self-directed IRA accounts, noting that there really is no difference.

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Patrick: Today, we’re talking with David Moore, co-Founder of IRA Advantage, a firm that specializes in truly self-directed retirement accounts.

David, what makes a real estate IRA different than other self-directed IRAs?

David Moore: Well really, there’s no difference at all between a real estate IRA and any other IRA. The thing that defines whether you can invest in real estate is not the law, it’s simply the custodian that’s providing you the investment opportunity. When we’re looking at moving out of a Wall Street driven IRA into a truly self-directed IRA, you’re going to be alone, everything you currently own, plus anything else the law allows, which would include real estate because the way the law works, unless it’s specifically prohibited, it is therefore allowed. A real estate IRA is literally no different than any other IRA. The laws have never changed. It’s been that way since inception in the ’70s. It’s really a matter of convenience more than anything with structure.

We’ve talked about checkbook IRAs in other segments, but checkbook IRAs allow management of assets. Passive investment in real estate, if you were to buy a piece of dirt and sit on it for 10 years, what we would deem a basic self-directed IRA’s going to work just fine in that scenario. Once again, that real estate IRA is no different than the IRA that allows you to buy the stocks and bonds and buy gold and anything else you might choose to buy.

What kinds of problems can people run into with them?

David Moore: Well, when you’ve got a self-directed IRA, especially with checkbook IRAs, where they allow immediate investment simply by writing a check, you don’t really have a safety net. The deal is that flexibility is a double-edged sword. You need to be diligent that you’re doing the correct thing. It’s important, for example, if you’re going to buy a piece of real estate. From the deal’s inception, it’s important that the deal is written correctly. If you were to tie up a property personally and sign it over to your IRA, that technically speaking could be deemed a prohibited transaction because you personally took the property off the market and then the IRA benefited from that. Any time there’s a benefit to a disqualified party, it can become problematic.

Another easy problem to have is if you have a basic account and you need work done on a property. Maybe the heat goes out. You need the furnace replaced, so in the name of efficiency you decide well, I’ll just get him out there and pay for it and then reimburse myself. Well, that’s a prohibited transaction. If it’s an IRA expense, it’s got to be taken care of by the IRA. It’s critical, and we break it down to the point where even naming the checkbook IRA LLC. When we ask people for names, they inevitably give us their name. We really discourage that. We want total separation. We want them to use a name that they are totally clear on. Every time they pull out a check or if they have a debit card, they see that name, they know it’s for their IRA. That way they’ve got the least opportunity to cause themselves a problem. But like we said, it is a double-edged sword. That flexibility is great, but it can be problem unless you’re diligent to make sure you’re doing the correct thing from inception.

Patrick: Thank you, David. Listeners may call 503-619-0223 or can visit IRA Advantage for more information.

The rules and regulations surrounding IRAs can be confusing for the average investor. And you can’t risk making a mistake and possibly subjecting yourself to significant tax liability. Call the experts at IRA Advantage today!