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Self-directed retirement accounts for real estate

By Merri Ann Simonson

Do you realize that you may use all or a portion of your retirement funds to invest in real estate? Retirement accounts are basically Trust accounts for your benefit when you retire. In the 1970s, the IRS approved real estate as an investment option you can purchase with your IRA or a 401 (K).

You may also obtain a non-recourse real estate loan that is granted to your self-directed IRA which will increase your purchasing power. Typically, the lender will loan up to 50% loan to value on a 3, 5 or 7 year adjustable rate mortgage. Today’s rates are around 4.5%-5.5%. There are several lenders that offer this very unique product. See link below.

This is an incredible tool for investors and real estate has historically been a good investment. Most individuals currently hold stocks, bonds or mutual funds in their IRA accounts, which can be sold to purchase a real estate investment. You can defer the tax on the gain from the sale of the stocks as they are not removed from your IRA account. Please be sure to check with your account manager regarding any fee or charges related to the sale of your current IRA investments.

As with stocks, you can buy and sell real estate within the IRA account and defer your tax payment on the gain.

When you hold real estate in the account, annually you must provide the IRA or 401(K) Trust Manager with an appraisal of the property and the balance of the operating checking accounts assigned to the real estate. This is an IRS regulation.

There are fees associated with this type of investment: possible LLC renewal fee with the state, Trust Manager’s annual asset fees and possible management fees. I partnered personally within the LLC that owns the real estate with my IRA, this allowed me to self-manage the account and avoid the expense of the Trust Manager for the day to day operation management of my asset, i.e., bill payments and rental income deposits.

Further, you can start moving a percentage of the real estate asset over from your 401 (k) at age 60 and pay taxes on the percentage of transfer in smaller increments. In my case I own a rental house at Roche Harbor that is valued around $700,000. Rather than me having to sell the home to liquidate and allow myself to transfer over small increments of cash from my 401 (K), I can deed a percentage of the real estate to myself personally each year. This avenue allows me to keep the real estate investment but remove it from my 401 (K), should I want to do so. Further it lets me stagger the tax due in smaller increments in years where my other income is down.

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Merri Ann Simonson

Coldwell Banker SJI