Pre-Foreclosure Properties in a Self-Directed IRA

Posted on November 11, 2014 by

For those of you with an interest in real estate, yes, you can buy pre-foreclosure properties using a Self-Directed IRA. The same goes for other self-directed retirement accounts, including 401(k)s, SEPs, SIMPLE IRAs, and even Coverdell Education Savings Accounts and Health Savings Accounts, if your balances are large enough to make it work!

There are a number of advantages to using a retirement account to acquire these properties:

If your plan is to fix them up and flip the house, and you do this a lot, you may fall under dealer tax rules. That means that unless you are conducting your flipping activities within a retirement account, all your profits will be taxed as sales of inventory – and therefore subject to taxation as ordinary income.

Furthermore, outside of retirement accounts, those who are classified by the Internal Revenue Service as dealers lose their ability to defer capital gains under Section 1031 of the Internal Revenue Code concerning like kind exchanges. And furthermore, the income may also become subject to self-employment tax of up to 15.3 percent.

On the other hand, if you choose to own these properties and sell them within a tax-advantaged retirement account, none of that matters: All capital gains and all income is tax deferred. If you pay cash for the property through your Self-Directed IRA or other retirement account, you only pay income taxes on the money when you take a distribution (subject to early retirement penalties as with other retirement accounts).

If you employ leverage to acquire the property within a retirement account other than a 401(k), however, you may be subject to unrelated debt-financed income tax. You are then liable for income tax on any appreciation attributable to borrowed money. That is, if you borrowed 50 percent of the purchase price to acquire a property within a Self-Directed IRA, then you would pay unrelated debt-financed income tax on 50 percent of your profits from the deal.

A few things to keep in mind when finding and purchasing pre-foreclosure deals for your Self-Directed IRA or other retirement account:

  • You cannot handle the transaction directly in your name. Instead, you should have third party administrator – such as American IRA – handle the transaction in the name of your IRA. You give us your written direction as to what property you want us to purchase (or sell) on your IRA’s behalf, who the counterparty is, and at what price. We handle the rest.
  • Your IRA or other retirement account cannot purchase or sell anything with you, your spouse or ascendants or descendants as counterparties.
  • You cannot use the property for your own personal purposes, nor can your spouse, decedents or antecedents. You must maintain an arm’s length separation in all the transactions your IRA or other retirement account makes.
  • You cannot remain overnight in the property, even for the purposes of working on it to prep it for sale or rental.
  • You cannot rent the property to yourself, a spouse, decedent or antecedent, nor to any entities controlled by a prohibited party.
  • You can use leverage. But any money you borrow must be borrowed on a non-recourse basis. That is, you may not pledge anything outside the retirement itself as collateral.

Want to know more? Give us a call at 866-7500-IRA (472). We’ll be able to answer your questions, and we will be happy to send you, free of charge and with no obligation, our exclusive guide to self-directed real estate investing within your IRA. Or visit us online at www.americanira.com. We look forward to working with you!

Jim HittJim Hitt is the Chief Executive Officer of American IRA and he has been committed to all aspects of investing for more than 30 years, using self-directed IRAs for his own investments since 1982. Jim’s forte is the financing and acquisition of real estate, private offerings, mortgage lending, business’s, joint ventures, partnerships and limited liability companies using creative techniques.

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