Expand your real estate buying power with self directed IRA options

Pooling IRA Money

Pooling your IRA money with other people’s IRA money or with other people’s own money is a great way to participate in opportunities that are too large to do alone. This is especially true with real estate transactions. By way of example, you discover an apartment complex or an office building that would make a great investment. Unfortunately, you don’t have enough assets to close the deal on your own. However, you have three friends that are looking for similar opportunities. You and your three friends can pool your IRA funds to make the transaction happen.

Using Debt to Purchase Real Estate

Your IRA can employ the use of debt to finance the purchase of real estate, but there are some rules to follow. First, the loan must be non-recourse, which means that you may not personally guarantee it. Second, in order to avoid potential penalties, only the assets of your IRA may be used to make the loan payments. Finally, you cannot use your own credit history to obtain the loan. The real estate purchased by your IRA is the only asset that a lender may use as security for the loan. Security Trust can help you locate a bank that makes non-recourse loans or you may find one on your own. Another popular financing option is to have the seller of the real estate take back a note at the time of sale. Real estate purchased with debt financing is subject to the Unrelated Debt Financed Income (UDFI) tax.

UDFI and UBIT

Unrelated Debt Financed Income (UDFI) and Unrelated Business Income Tax (UBIT) are areas of the tax law that can impact your IRA investments. UDFI is most commonly triggered when your IRA utilizes debt to finance the purchase of real estate, but any income produced by the borrowings of your IRA can also generate UDFI. The tax is based on the net income attributable to the debt on an annual basis. For example, IRA real estate purchased 50% with debt and netting $10,000 in a year has $5,000 in UDFI that is subject to tax. The tax resulting from UDFI must be paid from assets in your IRA. There are some exemptions from UDFI and some strategies you can use to reduce or eliminate the potential for tax. UBIT works in a way similar to UDFI, but the tax is triggered by the investment made and the type of income generated by the investment. UBIT is a complicated area of the tax law and Security Trust suggests that you consult with your tax advisor for guidance.