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IRA real estate lending is an investment option that has tremendous potential and can be incredibly lucrative for many people. Unfortunately, many people don’t even know this kind of investment opportunity exists. Whether you’re interested in residential investment properties or commercial investment properties, it is greatly beneficial to understand the basics of what IRA real estate entails.
  1. What is IRA Real Estate Lending?
  2. Why would I want to consider this kind of investment?
  3. Are there special stipulations related to IRA Real Estate Lending?
  4. Are there penalties for misusing IRA loans?
  5. What is the process for setting up an IRA loan?
  6. When can I gain possession of the real estate that I have purchased with my self-directed IRA?
  7. If IRA real estate investing is so lucrative, why don’t more people know about it?
What is IRA Real Estate Lending?
IRA real estate lending is the process by which you can self-direct IRA or other qualified retirement funds to purchase real estate. This is accomplished by funding the down payment of the purchase price with a qualified account and then obtaining a non-recourse loan to finance the remaining balance of the property’s purchase price. Self-directed accounts can even be used to purchase property or buildings in other countries. For more information on opening a self-directed IRA account, please contact Service Financial. You can mentioned you are working with Island View.
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Why would I want to consider this kind of investment?
In today’s market, mutual funds and other Wall Street investments that were deemed safe and fail proof have in recent years shown significant volatility and in most cases dramatic losses. Many people today are moving towards self-directed retirement accounts where they control more closely what their retirement account should invest in. Because IRA’s are qualified accounts, they are classified in such a way in which they cannot be accessed without negative tax consequences until much later in life. This can be a problem if you want to purchase investment real estate but simply don’t have any non-retirement funds available to do so.
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Are there special stipulations related to IRA Real Estate Lending?
In order for a self-direct IRA to fund a real estate investment, per IRS tax law, a qualified 3rd party administrator must facilitate the purchase of the property which ensures that the individual does not have personal possession or direct access to any qualified accounts. If this rule is not abided by, then the IRS classifies the money as an early withdraw which triggers not only a financial penalty, but also causes the proceeds to be subject to ordinary income tax rates. The 3rd party administrator facilitates the purchase of the asset and title is vested in the name of your IRA or designated account. A property can NOT be purchased in an individual name and afterwards transferred to your self-directed IRA. This is referred to as self-dealing and is strictly prohibited by law. If you purchase real estate within your self-directed IRA, you will not be able to live in the property or own it in your personal name. This also includes your family and anyone else who may be connected with the transaction that could stand to personally benefit from the transaction. Your IRA is only allowed to purchase assets solely for investment purposes and void of any personal gain or benefit prior to taking a distribution from the account.
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Are there penalties for misusing IRA loans?
There are fines and penalties for violation of the terms of IRA lending. The 3rd party administrator can also assist you in confirming that a transaction is eligible. Another way to properly plan for correct use of this type of investment is to work with a knowledgeable CPA and financial planner. Prohibited transactions from IRA loans can also lead to complete disqualification of the IRA itself, so it is imperative to be very careful in this matter.
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What is the process for setting up an IRA loan?
Once you have found a trusted 3rd party custodian, they will assist you with paperwork and compliance documentation necessary to transfer your qualified accounts to their trust account.  Island View Mortgage works closely with and recommends Service Financial for a 3rd party facilitator.  First, a plan is decided upon and approved. Then the funds from your IRA are rolled over into the new self-directed IRA held by the administrator. If you are pooling a number of IRAs, as in perhaps you are clubbing your IRA with that of your spouse, all these funds will be rolled into a new self-directed IRA. Upon a property being selected to purchase, the custodian will then take appropriate steps in order to help you facilitate purchase that will be title in your IRA.
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When can I gain possession of the real estate that I have purchased with my self-directed IRA?
Once you have reached the certified retirement age, you will be able to collect a portion of the property title as a distribution of your IRA account. By utilizing IRS section 72(t), where if the distributions are amortized, one may be eligible for early withdraws without being subject to any early withdraw penalties. Please consult with your CPA for specific details.
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If IRA real estate investing is so lucrative, why don’t more people know about it?
This subject is still a bit of a mystery to many people. Because it is an alternative investment as oppose to a mutual fund or more widely quantifiable investment, most stock brokers and investment advisors simply don’t have experience offering advisement in this area. Self-direct IRA’s are an ideal way to take advantage of the present real estate market. Many financial institutions deem this type of non-recourse loan as safe and lucrative because of the large down payment required (typically 35% or more) and the excess account reserves that ensures repayment of their loan.
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