Simply, it is a retirement account that allows investment to grow tax-free. “Does this include property investment?” Yes, it does.
“I have seen people flip properties in Baltimore and DC and have earned $20,000 tax-free. I think even in this economy everyone like to have extra $20,000 to put toward their retirement,”
How does this work?
1. First, you create a self-directed ROTH IRA by depositing a small amount of money with a self-directed IRA administration company.
2. Next, you look for a property with some equity, and write a contract to buy.
3. With the self-directed IRA administration, you will want to be the custodian of it. At the time of the purchase of the property, you will want to write “Self Directed IRA Administration Company, custodian for your name in the buyer’s signature line.
“I did this myself and sole a property for $20,000 more than my contract. My $20,000 profit went to my IRA account, which was tax-free money,” said Johnson. Many investors ask wonder if they can have access to this money immediately.
Well, the IRS has some stipulations on many IRAs including the self-directed IRA. First, you cannot touch the money until the age of 59.5-years-old. There are exceptions if you become disabled, educational expenses, unreimbursed medical expenses that exceed 7.5% of your adjusted gross income, medical insurance premiums, expenses involved with building or buying your first home, and levy payments to the IRS.
“Many investors can pay themselves a management fee for directing their own investments. No more than 20 is advised,” according to Johnson.
Regarding what form to file when buying and selling real estate options through your IRA, use Form 5498. When you bring debt into the picture, it creates UBIT (Unrelated Business Income Tax) and UDFI (Unrelated Debt Financed Income) and form 990T may have to be filed. The tax is not huge, so it can still be worthwhile to leverage (finance) your ROTH IRA/LLC to purchase property. And if you plan your exit strategy right and pay off the loan 12 months prior to selling, and there would be no UDFI to pay.
“These forms can become cumbersome for many new investors or even some seasoned investors. It is advised if you speak with a professional who deals these forms on a daily basis,” said Johnson.
For more questions about this topic, please go to www.pillarprodeals.com