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4 Alternative Investment Opportunities Available Through a Real Estate IRA and Word Of Caution

As people continue to look for alternative investment options in these tough economic times, we are seeing more and more people turning to self directed IRAs. This is because self directed IRAs offer vastly more investment options and choices than traditional IRAs. One of the more popular of these options is real estate and there are a wide variety of real estate investment opportunities to choose from with a self directed IRA.

Residential Real Estate Investing

One option for those with a self directed IRA is to invest in residential real estate. There are two strategies that people typically use here. One strategy involves investing in residential properties and holding on to them to collect rent on those properties. The other strategy involves flipping houses by fixing them up and then selling them. Either of these choices can be viable options for investing in a real estate IRA.

Commercial Real Estate

Investing in commercial real estate presents another opportunity for those with a self managed IRA. It is possible to invest in commercial properties such as office buildings or stores. Much like with residential real estate, it is possible to hold on to these commercial properties and collect rent as a flow of passive income.

Trust Deeds and Mortgage Notes

Another way to invest in real estate with a self directed IRA is through the purchasing of trust deeds and mortgage notes. This investment option allows the owner of the IRA account to become a lender through a promissory note that is backed by the deed to the property. This adds extra security to the investment as the IRA will gain ownership of that property, after foreclosure, if the borrower is unable to pay and defaults. This means that the IRA account holder can sell this property to make back a portion or all of their original investment.

Offshore Real Estate

Owners of self directed IRAs can also invest in offshore real estate. By looking at foreign real estate opportunities, investors can broaden the scope of their investment options. Although many of the same rules and processes apply to investing in foreign real estate as with investing in domestic real estate, these types of investments typically require more caution and research as they are in a different countries.

Prohibited Transactions and Disqualified Persons IRA Rules

Although there are numerous real estate investment opportunities through self directed IRAs, there are still some rules and restrictions. It is important to be aware of these regulations as well as adhere to them to guard against penalties and avoid paying extra taxes.

The first set of these restrictions are described as prohibited transactions. These types of transactions involve the inappropriate use of an IRA and will be penalized.

The first thing to remember that any income received from real estate IRA investing must go back into the IRA itself. Any action involving a property owned by an IRA that brings personal direct benefit to the account holder of that IRA is considered a prohibited transaction. Other prohibited transactions include using property owned by an IRA as a vacation home or as collateral for personal loans.

Along with prohibited transactions, it is important to keep in mind rules regarding disqualified persons. The term disqualified persons designates the types of people that are barred from involvement in real estate IRA investing. Individuals that fall under this category include: family members such as the account holder’s spouse or children, personal advisors or custodians of the IRA, and any type of business that the owner of the IRA has at least 50% ownership of.

When investing in real estate through a self managed IRA it is important to keep in mind the rules and regulations regarding prohibited transactions and disqualified persons. By adhering to these restrictions, a person can avoid being penalized and protect their investments for the long term. Investing in real estate through self directed IRAs is becoming an increasingly popular practice as people begin to realize the options are numerous and there are many viable opportunities for successful investing.

Joshua Geary is a financial writer and experienced blogger for the real estate IRA for Sunwest Trust, Inc. When he’s not writing about IRA investment options and the self directed IRA rules and regulations that go along with them, Joshua enjoys reading and swimming in his leisure time.

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One Comment

  1. Great article. There is a lack of discussion on this topic. Placing investment real estate into a IRA can be a great way to create stable retirement income. Over the long-term, real estate is much more stable than stocks and it can create a stabilizing affect allowing for more riskier investments that create a greater return.


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