If you don’t have enough funds for a cash purchase of real estate with your IRA, you can partner with others.
Okay, so you’re ready to take advantage of all the benefits of real estate in a self-directed IRA—the tax-free profits, the asset protection, and the potential for high returns and creating lasting wealth. You even have a couple of investment properties that you’re ready to purchase.
The only problem…? You don’t have enough money in your IRA to purchase the property outright, and you don’t want to get a non-recourse loan.
Fortunately, you have options—including having your self-directed IRA partner with other investors to purchase the property. This is often called “purchasing an undivided interest” in the property.
How to Partner to Purchase Property with Your Self-Directed IRA
Here’s how to purchase property with a self-directed IRA by partnering with other investors:
- Seek out potential partners in friends, family members, co-workers, or business associates.
- Once you’ve identified a partner for the deal, combine your self-directed IRA funds with the other investor’s funds to purchase the property.
- Your self-directed IRA then owns a percentage of the property proportionate to the percentage of funds you contributed.
- Your self-directed IRA is responsible for a portion of all property expenses equal to the percentage of ownership, and the same portion of all income related to the property goes into your self-directed IRA.
- Once the property is sold, your self-directed IRA receives a portion of the proceeds matching the proportion of your original investment.
You don’t have enough money in your IRA to purchase the property outright, and you don’t want to get a non-recourse loan. Fortunately, you have options—including having your self-directed IRA partner with other investors to purchase the property. This is often called “purchasing an undivided interest” in the property.
Isn’t Partnering with Myself or Family Members a Prohibited Transaction?
While the premise is somewhat similar to a prohibited transaction, they’re actually two completely different scenarios. The difference is based on who currently owns the property or investment.
If you, a family member, or other disqualified person (see Prohibited Transactions) already owns a property, then investing in that property with your IRA is prohibited.
However, in the partnering scenario, if you and a family member or other partner want to purchase a new property that’s not already owned by a disqualified individual, this is not a prohibited transaction.
Video: Partnering Self-Directed IRAs
A Partnering Example with Your Self-Directed IRA
Let’s assume that the property you want to purchase costs $100,000, but your self-directed Roth IRA has only $20,000. You reach out to a friend of yours who has $30,000 in a traditional IRA and a business associate who can invest $50,000 of his own money. Combining the money together, you now have sufficient funds to purchase the property.
Your self-directed Roth IRA now owns a 20-percent interest in the property.
Title for the property reads:
Equity Trust Company Custodian FBO [Your Name]
Roth IRA 20% Undivided Interest
Going forward your self-directed Roth IRA is responsible for 20 percent of all expenses related to the property. Similarly, your self-directed Roth IRA receives 20 percent of all income generated by the property.
A year after purchasing the property, you and your partners decide to sell it for $150,000. With a 20-percent interest, your self-directed Roth IRA receives $30,000 or 20 percent of the sale proceeds—an amazing 50-percent return ($10,000 profit) on your original $20,000 investment.
As you can see, even without a large bankroll to start out, you can still create profitable real estate investments with your self-directed IRA.
Note: While this type of transaction is fairly straightforward and common, you’ll want to make sure it’s at “arms-length” and that you avoid the possibility of “self-dealing,” both of which are prohibited by IRS regulations. Consult with a financial or tax professional.
Other Ways to Partner for a Purchase
The above example is just one way to potentially partner your self-directed IRA. Learn about other potential options: Discover 6 Ways to Partner Your IRA.
1
Can I co-invest other funds with my IRA to make an investment?
Yes, partnering your self-directed IRA or other retirement account with another funding source is possible. You can partner your IRA with your non-IRA money, your other retirement accounts, your spouse’s IRA, other people’s IRAs, another investor’s non-IRA money and your children/grandchildren’s CESAs, to name a few options.
2
Can my IRA invest in a newly formed entity that will invest in real estate?
Yes. Investments in newly formed private entities, such as limited partnerships, limited liability companies, C corporations or land trusts, are permissible under the Internal Revenue Code, with the exceptions of subchapter S corporations.
