Self Directed Real Estate IRA: Can You Dramatically Improve Your Returns? ~ By Chris Anderson, Ph.D.

January 1, 2006

As part of our live teleseminar class last night, a discussion broke out about using IRA's to invest in real estate in order to dramatically increase the rate at which wealth can be accumulated.  To quantify this, we were talking about a series of only six investments producing almost ½ million dollars while only starting with $30,000.  However there is one catch: each of those investments must be done on a tax deferred basis.  A self directed real estate IRA would be one possible path for this but there are multiple pieces we need to understand.

For anybody with money in an IRA, or an educational IRA, or a Keogh plan, a savings incentive match plan (SIMPLE), or a simplified employee pension (SEP) that is interested in real estate investing, then they typically have the following goals:

• Getting Access To The Funds For Real Estate Investing; and

• Growing Profits In A Tax Deferred Environment.

For many people, their IRA or retirement accounts are their largest source of available investment capital.  Unfortunately, most of this capital is very poorly utilized with most not keeping pace with inflation after all management fees are paid.  What many people would like to do is create the equivalent of a self directed real estate IRA that put the control back into their hands.

Like anything else related to real estate investing, there are people who understand all the tiny details of how to structure investments using your IRA.  When you get ready to actually use your IRA, then you can consult them to get all the details, forms, etc.  However, the real estate investor needs a working knowledge of how to create a self directed real estate IRA and what some of the pro's and con's might be.  In this series of articles, I will attempt to provide that kind of top level working knowledge in a question and answer format.

Are there self directed real estate IRA providers?

No, there is really is no such thing. However, I will keep using this terminology since it really highlights what we are trying to accomplish.  In reality, any self directed IRA can then be turned into a self directed real estate IRA.

What is meant by a self directed IRA?

Historically, banks, brokerages, and other companies have been the administrator for IRA's.  Even though using an IRA for real estate investing is perfectly compliant with tax laws, most companies have been unwilling to administer IRA's where the individual has wide latitude over their investments.  Why?  Simply because they want to sell you their own products like CD's, mutual funds, etc. 

Are there well established companies that offer self directed IRAs?

These days, there are lots of companies that offer these services and are extremely professional and reputable.  A simple search on Google will provide a wealth of them to research.  My suggestion would be to stick with some of the largest names out there.

What can you invest in with your IRA?

The more appropriate question is what can you NOT invest in.  The IRS simply provides a list of transactions that are excluded.  These excluded items are:

• Collectibles (e.g. art, antiques, jewelry etc.)

• Life insurance

• Coins (other than U.S. gold coins)

Anything else is fair game including any type of real estate, businesses (LLC's, Limited Partnerships, Corporations, etc.) and the list could go on for pages.  VERY IMPORTANT:  If you are told that you cannot invest in these items, that is because YOUR IRA ADMINISTRATOR does not allow it.

What is a prohibited transaction? Many people limit their IRA investments for fear of making a prohibited transaction.  What people need to realize is that a transaction is NOT PROHIBITED if it is not part of the list above AND is not with a disqualified person.  In short, a disqualified person is you or a family member.  There are very specific, and well documented, rules that you can easily find on the internet about disqualified people.   Can you give an example of using a  self directed real estate IRA? Suppose you found a two parcels of land that you purchased, each costing $50,000.  For lot#1, you purchased personally and paid cash and for lot#2, you purchased with your self directed real estate IRA and paid cash.  Suppose in a 9 month period, you received a spectacular gain of $20,000 per lot, or equivalently a 40% return.  For lot#1, you would have to pay taxes at your regular income rate which we will assume is 28% ($5,600 tax bill).  For lot#2, all funds are returned to your self directed real estate IRA without paying taxes (Wahoo!!!).  Can you finance real estate purchased by a self directed real estate IRA? Yes, but lots to discuss here that makes this a bit painful.  This will be the subject of next week's article. Can you suggest other material that might help with understanding the use of IRAs for real estate investing? Patrick Rice's book, IRA Wealth is pretty good.  He covers a lot of the issues but unfortunately mixes a lot of real estate investing advice with what you really need to know about IRA investing.  Hopefully, this has given you a starting point for understanding how to use a self directed real estate IRA to build long term wealth.  Our next two articles, Using Financing With Your Self Directed Real Estate IRA ; and Practical Real Estate Investing With Your Self Directed Real Estate IRA will attempt to tie the entire picture together. About The Author Dr. Chris Anderson is the founder of one of the largest preconstruction groups on the internet today and is referenced in many venues including the New York Times and USA Today. Get access to wholesale property investments today. Note:  This article may be copied for use on other websites under the following conditions: It is not altered in any way. The about the author is included The http://www.GetPreConstructionDeals.com hyperlink remains intact.