YOUR GUIDE TO INVESTING ON LBI

The IRS allows an IRA, Individual 401(k), or HSA to acquire real estate as an asset without penalty and while keeping the tax benefits associated with that account type.

An IRA can purchase any type of real estate, including residential, commercial, raw land, agricultural, and more. The IRA can buy the property outright, meaning the IRA is the title holder. If the IRA does not have the full purchase price, the IRA can partner with a person, company/entity, or another IRA. It can also secure a non-recourse loan (see below) to buy real estate. This can be an attractive option when buying an investment property in the LBI real estate market.

Real estate in an IRA provides the opportunity to generate income from rent, appreciation, fixing and flipping, and more. It has been possible to participate in real estate as an asset since the inception of IRAs. The IRS requires an authorized IRA provider for all IRAs. Not all IRA providers handle real estate, but New Direction IRA does. You, the IRA holder, along with your financial professional, select the property and negotiate the terms. New Direction IRA makes sure that the paperwork substantiates that the asset is part of your IRA and, thus, deserves the tax benefits associated with the account type. It is important to remember that the Long Beach Island real estate market has a significant source of rental income. Buying an investment property with funds in your IRA and collecting the rental income can be a unique way to balance one's portfolio.

Real Estate is a tangible asset and one that you can see, touch and feel. Investment properties can potentially yield rental return as well as market appreciation.

You have strategic control over the properties that your retirement account owns.

You can buy, sell, and exchange properties without tax consequence.

Historically the LBI real estate market has seen strong market appreciation all the while being able to collect lucrative summer rental income.

An IRA is its own financial and legal entity, separate from your personal finances. 

As a separate legal entity, your IRA has its own name: New Direction IRA, Inc. FBO client name, IRA

The IRA is the owner of the real estate, not the IRA holder. 

Therefore, purchase and maintenance costs are paid by the IRA and all income (e.g. rent) goes back to the IRA.

All legal documents (offer, closing documents, leases, etc.) related to an IRA- owned asset must be in the name of the IRA, not your personal name.

Documents associated with your IRA’s real estate acquisition need to be signed by New Direction IRA (as the administrator for that account) to be legal.

Neither the IRA holder nor any other Disqualified Person to that IRA may live in or use the property.

Disqualified Persons cannot work on the property, for free or for pay. “Sweat equity” is not allowed. Any remodeling, repair, improvement, and even maintenance must be performed by a non-disqualified person or entity.

Your IRA cannot purchase a property from you or any Disqualified Person, nor can your IRA sell a property to a disqualified person.

Neither you nor a Disqualified Person can guarantee a loan for an IRA property. Disqualified Persons are not allowed to be paid by the IRA.

1. Traditional IRA

2. Roth IRA

3. SEP IRA

4. SIMPLE IRA

5. 401(k) Plan

6. HSA – Health Savings Accounts

Hold title to Real Estate - A real estate contract is written between the IRA and the seller. Funds from the IRA are sent to closing for the purchase and the IRA takes title to the property directly.

Tenants-in-Common with a partner entity - This is one of the ways an IRA can participate in a real estate asset without necessarily having the entire purchase price. The partner can be a person (even a disqualified person), an IRA, a company, or other entity.

Private Equity in an entity (like an LLC, LP, C-corp., etc.) that then invests in real estate - The asset in your IRA in this case is shares of a private company or percentage ownership in that company.

Loan money to a borrower who uses Real Estate as collateral - You can think of your IRA as a private lender. Your IRA can lend money to non-disqualified persons and secure the note with real estate holdings and/or other assets if you like. You and the borrower decide on the term, collateral, and the rate.

An IRA may secure a loan to purchase property. According to the IRS, it must be a non-recourse loan (the lender is acknowledging, in the case of default, their only avenue for remuneration is the property itself). Not all lending institutions and banks offer these types of loans, but several do exist. Also, a non-recourse loan can come from a private lender.

When an IRA purchases real estate using a non-recourse loan, the debt financed portion of the property’s profits may be subject to Unrelated Business Income Tax (UBIT). Similarly, if an IRA-owned property is sold while a percentage of ownership is still debt financed, the profits derived from the debt financed percentage may be subject to UBIT. UBIT is calculated on a form 990-T and is paid by the IRA. It does not affect the IRA holder’s personal taxes.

Step 1 – Open your self-directed IRA and fund it with a rollover, transfer, and/or
contribution.

Step 2 – Work with your real estate agent to find a property.

• Make sure the offer/contract reflects the IRA as the buyer. (Purchase contracts in the name of disqualified persons cannot be assigned to the IRA via an assignment, amendment, etc.)

• Do NOT put the contract in your name or personally pay the earnest money. Please complete all investment documents using the following guidelines:

• BUYER / OWNER NAME:
  New Direction IRA, Inc. FBO John A. Smith IRA
  -OR-
  New Direction IRA, Inc. FBO Account No. 12345678
  -OR-
  New Direction IRA, Inc. FBO John A Smith, IRA, Account No. 12345678

If you partner your IRA with a disqualified person/IRA/entity, you must establish the percentage of ownership at the beginning of the investment. Those percentages will be used to divide up the incoming revenue and pay all expenses, including earnest money.

For example: The vesting would be shown as follows, assuming a 60/40 split (the percentages can be anything from 50/50 to 99/1):

New Direction IRA, Inc. FBO John A. Smith IRA, as to an undivided 60% interest, and John A. Smith, as to an undivided 40% interest.

-OR-

New Direction IRA, Inc. FBO John A. Smith IRA, as to an undivided 60% interest, and New Direction IRA, Inc. FBO Joseph B. Smith IRA, as to an undivided 40% interest.

Earnest money must be paid from the IRA or by a non-disqualified person who may then be reimbursed by the IRA.

Can I buy real estate in my Retirement Plan?
Yes! The IRS has had this question so many times they answer it directly on their website (www.irs.gov). In their retirement Q & A section they say “IRA law does not prohibit investing in real estate but trustees are not required to offer real estate as an option”. Therefore, to invest in real estate your IRA custodian must allow it. New Direction IRA handles real estate and many more alternative assets.

Why haven’t I heard about real estate investment in IRAs before?
Retirement investing has been dominated by the securities industry since 1974 but real estate has always been available to IRAs. The opportunity to invest IRA funds directly in real estate is an option that many people are just learning about.

I have a 401(k). Can I invest that in real estate?
Your 401(k) plan may, at your direction, be invested in real estate if the investment provisions of the plan permit it. The employer establishes the plan for the benefit of the employees, and that employer will have language incorporated in the plan document which states what investment options are available to the employee. If you have a 401(k) from an employer for whom you no longer work, those funds can be rolled over to a traditional IRA with no tax consequence. From there, you can invest in real estate.

What about borrowing? Can my IRA get a mortgage?
Yes, the IRS requires that the loan be a non-recourse loan. The lender can be a bank or a private lender. IRA non-recourse loans tend to require a higher down payment than those for personally guaranteed loans.

What are the restrictions for the purchase?
The primary requirement is that the purchase be for investment purposes only. The IRA owner, certain family members, and plan fiduciaries cannot use the property while the IRA owns it. Your IRA is not allowed to buy property you already own personally.

What can I invest my IRA and qualified plans in?
There are two broad asset categories that are not allowed: life insurance and collectibles. Beyond that, the IRS does not approve any specific investments. Usually limitations on asset types are a result of the IRA provider’s business model, not IRS regulations.

Do I need to use a special broker and title company?
No special broker or title company are required, you can use the same ones you used to buy your current home.
How are the expenses paid on an IRA-owned property handled?
Expenses are to be paid directly from the IRA. If the IRA owns 100% of the property it is responsible for 100% of the expenses. If your IRA is a partner, it is responsible for its portion of the expenses. Because the IRA must pay the expenses it is important to make sure there are sufficient funds in the IRA to cover the expenses. When purchasing the property don’t forget to take expenses into account.

Where does rent income go?
Rental income from the investment goes directly into the IRA.

How long must my IRA own a property before selling it?
There are no time restrictions or limitations on buying or selling a property.

Do I have to pay capital gains taxes if I sell the property?
Because the property is owned within a tax deferred (Traditional IRA) or tax free (ROTH IRA) plan, no capital gains taxes need to be paid as long as there is no outstanding debt leverage for 12 months prior to the sale. If there is outstanding debt leverage, UBIT may apply to the percentage of that leverage.

Can I take property as a distribution and then live in it?
Yes, after you reach 59.5 years of age you may choose to take the property as a distribution from your IRA. Once the property is 100% distributed, it is in your possession and you are free to use the property as you wish.

Phone:
303-546-7930

Toll Free:
877-742-1270

Fax:
303-665-5962

Email:
info@ndira.com

Submit documents:
emaildocs@ndira.com

Address:

1070 W Century Dr.
Ste 101
Louisville, CO, 80027