Question about investing retirement funds? - Posted by Mike

Posted by Penny on May 14, 2007 at 12:04:50:

I am researching this, also. What I have found so far is that there are some pretty strict IRS rules to be followed, but it can be done. All profits go back into the IRA and all expenses need to be paid from the IRA.

The IRS code allows real estate investments with IRA funds, however, most financial institutions don’t support this and they don’t have to. As custodians, they have chosen investment vehicles to offer their clients for IRA money and it doesn’t usually include real estate.

The most important rules to know are the prohibited transactions, and the potential UBIT taxes incurred if additional financing is used. Prohibited transactions basically mean that you and disqualified persons cannot directly benefit, e.g. your taking a vacation in a vacation property owned by the IRA, etc. The losses/gains have to be completely within the account.

As for UBIT, in a nutshell, if you put down 40% with IRA funds and finance 60%, then 60% of your profits are subject to unrelated business interest taxes (UBIT). UBIT laws address market inequities between non-profit and for profit entities. These taxes are paid from the property profits. Also, the IRA owns the asset. The UBIT is important because it would affect your investment rate of return for the IRA.

If you use your IRA to fund the down payment, you cannot personally guarantee the loan (prohibited transaction). Because of this, there are fewer lenders who will do this type of transaction and you can expect to put even more down, such as 30%-40% down payment.

In addition to the self directed IRA, there is an entity called a self directed IRA LLC that facilitates real estate investments with IRA funds. But I am still researching this.

I would be interested in what you have found out as well.

Question about investing retirement funds? - Posted by Mike

Posted by Mike on May 14, 2007 at 10:00:52:


I’d like to get some advice on using 401k funds for RE investments. My understanding is that you can place retirement money into a self-directed IRA and then invest those funds into any investment vehicle you want.

My thought was to take my 401k and buy a commercial prop. Perhaps NNN or multifamily. My question is this. How is any residual cash-flow handled? Is there any way to use any of those dollars outside the IRA and pay taxes on just those funds, or must it all be re-invested back into the IRA?