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Real Estate in your Self-Directed IRA or Solo 401(k)

Some self-directed IRA accounts or Solo 401K plans give the flexibility to invest in real estate. As the stock market has tumbled, we have seen a surge of interest among our accountholders to use their IRA or Solo 401K to invest in real estate. If you have an IRA or Solo 401K that have the above mentioned flexibility (contact Sterling Trust to find out more) and you are considering whether to invest in real estate through your IRA or Solo 401K, here are some important points to keep in mind:

You may be able to use funds in your IRA or Solo 401K to direct the purchase of raw land, commercial buildings, condos, residential properties, rental properties, vacant lots or acreage, and even to purchase trust deeds and real estate contracts. You cannot have any personal use or benefit of the property while it is held in your retirement account. In other words, you cannot purchase your residence or an office building in which your business leases space. The purchase of the property must be made for investment reasons only.

The property may be rented to an unrelated party if you wish as long as the rental income flows back to your IRA or Solo 401K. For rental property, a thirdparty property manager is required.

Sterling Trust, as do other trust companies, requires that the outright purchase of real estate be wholly-owned; no debt-financing is permitted. However, the property may be held in conjunction with other owners, as long as the deed to the property reflects the appropriate portion owned by your account as an undivided interest. (Note: This requirement does not apply to real property which is purchased by a limited partnership or limited liability company.) Any expenses (property taxes, insurance, appraisals, etc.), as well as any improvement or repair costs must be paid for out of your retirement account. In addition, any expenses or costs must be paid directly by Sterling Trust to the third party that performed the work. This means, you can not pay for an expense or cost out of your own pocket and have your Sterling Trust account reimburse you.

Your IRA or Solo 401K should have some liquid funds available to pay for any expenses (taxes, insurance, etc.). If your account doesn’t have sufficient funds for these costs, you will have to make annual contributions within the federal guidelines or else withdraw the property and pay taxes and possible penalties. If you put up earnest money with your personal funds, you’ll need to make sure you include that amount in the total due so that the title company can reimburse you upon closing.

You will be required to appoint a Real Property Servicing Agent to provide servicing functions (filing of the deed, collection of rental income, etc.) on behalf of your account. Sterling Trust provides a Real Property Servicing Agent Agreement for this purpose.

You can not place a real estate property that you already own into your IRA or Solo 401K. This means that you, your spouse, or your family members could not have owned the property before it’s purchased by your IRA or 401K. You will be required to furnish Sterling Trust with an appraisal every 3 years. Sterling Trust does not allow foreign real estate properties to be held. Any real estate property must be in the U.S.

The purchase must be made by your trust company as your custodian — not by you personally. Sterling Trust requires that we hold the original recorded deed to the property in safekeeping. The deed should reflect the name of your trust company, Custodian FBO (your name and account #).

Real estate is generally not considered a liquid investment. If you are approaching retirement or anticipate that you will need to draw upon your IRA or 401K funds soon, real estate may not be the thing for you.

If you would like more information or to contact Sterling Trust, please fill in the form below and click submit.

If you decide you want to have personal use of the property, you would need to withdraw the property from your IRA or 401K as an in-kind distribution (at the current market value) and pay any taxes if your IRA is not a Roth before you move in. Although your Sterling Trust self-directed IRA or Solo 401K certainly opens up more options for investing your retirement dollars, as with any investment, it’s important to do your homework and understand what you’re getting into. For more information about holding real estate in your IRA or Solo 401K, from Sterling Trust fill in the form below.

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