Investing in Real Estate With a Self Directed IRA
Self-directed IRAs enable investors to take control of their retirement savings. But with that comes additional responsibility.
Custodians play an invaluable role when it comes to managing an IRA account. They keep records, file required tax reports and offer guidance regarding prohibited transactions.
However, when investors decide to explore options outside of what their IRA custodian has available to them, an EIN may become necessary.
Investing in Real Estate
Self-directed Individual Retirement Accounts (SDIRAs) allow their account holders to make investments across a wide variety of assets, such as real estate. SDIRAs allow account holders to invest in real estate as a safe haven from market volatility and as an excellent source of income; however, it’s essential that investors understand all applicable rules prior to investing using an SDIRA for real estate; specifically revenue generated from property sales must be diverted back into the retirement account in order to avoid unrelated business taxable Income (UBTI).
As part of their compliance with IRS rules, an IRA owner must cover all expenses related to real estate investments (insurance, utilities and homeowner association fees, for instance) from funds within their retirement account. Furthermore, selecting a custodian experienced with administering Self-Directed IRAs is also key – living or allowing family members to occupy a property when not being rented is forbidden, as this could incur substantial tax penalties.
Investing in Precious Metals
Investing in precious metals through your self-directed IRA can provide diversification. However, investing in collectibles requires taking an unconventional approach with additional risks and compliance concerns to consider.
Collectibles encompass an expansive category of items including artwork, antiques, baseball cards, memorabilia and rare coins. As investing in such collectibles may violate IRS-approved investment asset lists before proceeding, caution must be exercised when considering such purchases.
Self-directed Individual Retirement Accounts (SDIRAs) give investors access to nontraditional investments like real estate, precious metals and shares of private companies that fall outside the traditional realm. As with traditional IRAs, SDIRAs have unique tax rules. For instance, when investing in real estate or operating businesses that produce unrelated business taxable income (UBTI), an SDIRA must obtain its own EIN quickly in order to file Form 990-T as soon as possible in order to avoid unintended tax consequences that could include extra taxes or financial penalties from extra tax authorities.
Investing in Private Placements
Self-directed IRAs allow you to have complete control over your investment choices, giving you full flexibility when selecting investments such as private placements. Private placements refers to investments made in privately held entities which aren’t publicly traded like limited partnerships and LLCs.
As these investments may not require Securities and Exchange Commission (SEC) registration requirements and typically only available to accredited investors, it is imperative that you conduct your due diligence prior to investing.
Examine the business’s investment documentation and management team as well as being aware of prohibited transactions and ensure that any investments meet IRS rules for commingling funds with disqualified persons (i.e. the IRA holder and immediate family members). Be sure to seek further clarification from a tax or financial advisor regarding these rules.
Investing in Tax Lien Certificates
Tax lien certificates offer an effective way to diversify your retirement portfolio. Issued when property owners fail to pay their real estate taxes, investors can purchase these certificates at public auction and collect interest payments as homeowners repay their debts – an investment which offers high rates of return – but may pose significant risk should some homeowners be unable to repay or declare bankruptcy.
If your Self-Directed IRA makes investments requiring reporting of Unrelated Business Income (UBIT) or taxable distributions, an EIN for its entity will likely be necessary. This may occur if it participates in partnerships, LLCs or other private entities which generate UBTI; Form 5498 must then be filed with your custodian annually using this unique Account Holder EIN number to complete reporting requirements.
An EIN is typically not required when opening and operating an Individual Retirement Account (IRA), as these accounts can typically be reported under an individual’s social security number. However, an EIN may be required in certain instances such as when engaging in checkbook control structures or producing unrelated business income taxation.
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