How to partner with your IRA to buy Real Estate
Question – Is it possible to “partner with my IRA” on a real estate investment?
A common question that I receive surrounds the idea of partnering IRA funds with other individuals and/or entities. The answer to the question above does happen to be, yes, and is made possible by U.S. Department of Labor ruling 2000-10. Certain rules still apply to maintain the tax-advantaged status of the retirement plan however. Here are the basics for partnering with an IRA.
An IRA can partner with any person, entity or IRA. In partnering, the IRA would own only a specified percentage of the property and the remaining portion would be owned by someone else. The logic is that each investor and their ownership are independent of one another and therefore, separate arms length investments.
One restriction that you’ll encounter when partnering your IRA with disqualified persons is a requirement to maintain ownership percentages in a constant undivided interest through the life of the investment. All incomes and expenses must be split according to the undivided ratio of ownership. For example, if my IRA owns 25% of a property, it must take responsibility for 25% of all expenses and receive equal portions of all income and/or sale proceeds.
Although these restrictions require an active investor to properly manage the investment, a good self-directed IRA provider can smooth the edges and make your investment and management process easier. Partnering with your IRA has worked for some of our clients and can be a valuable tool to increase retirement funds and acquire lucrative real estate assets.
And, contrary to popular belief, you don’t need to start an LLC when partnering with your IRA to purchase real estate. You can also partner with non-disqualified persons to your IRA such as your siblings or cousins to set up a more flexible investment plan.
Comments (8)
I have a question about depreciation. Can you still depreciate the property on your taxes if you are partnering with your IRA. Because to me the negative part of using your IRA is that you do not get the tax benefits of depreciation. Am I right about that or am I missing something
Michael Roby, about 8 years ago
If you decide to leverage your real estate investments in an IRA with a mortgage, the IRA can use depreciation to offset unrelated debt financed income (UDFI) subject to Unrelated Business Income Tax (UBIT). If you spend time learning about UBIT, you'll understand how all of the same tax advantages can be used to offset tax caused by debt.
If you purchase a property with cash in the IRA, the profits derived are tax-deferred (tax-free in a Roth). This is the benefit of using IRA funds for certain investment opportunities. Keep in mind that IRA funds are separate from your personal finances and depreciation (even when permissible) does not effect your personal return. Investing IN vs OUT of an IRA is like comparing apples to oranges. Practice making some comparisons for yourself to see if an IRA works better for particular real estate deals.
Good Luck!
Loren Whitney, about 8 years ago
One important rule to keep in mind is to be able to partner with your IRA you have not NEED to do it. Meaning if you can do the deal without the IRA you can partner with it and if the IRA can do the deal without you then you can partner with it. So basically the main reason people want to partner with the IRA (To be able to use "all" your money to do a deal that you might not be able to otherwise) is an exclusion.
Shaun Reilly, almost 10 years ago
Good point Shaun. It can also make financing more complicated as well since both the IRA and a disqualifed person are involved in the same deal.
Loren Whitney, almost 10 years ago
If Shaun's comment is valid, when does this structure have a practical application? There is not much of a reason to partner with your IRA unless you need to.
Mike Dymski, over 7 years ago
If you're paying cash for a deal and you'd like to involve the IRA as a partner. That would be one practical application.
Loren Whitney, over 7 years ago
I would like to know more...could I purchase an investment property 50/50 between my Roth IRA and myself as an individual? If so, could I manage it myself or does it have to be "hands off" since 50% of it would belong to my Roth IRA?
Helen Julian, almost 10 years ago
As soon as your IRA becomes a partner in your own personal deal, all the "hands off" rules apply. You would need to be comfortable with decision making abilities only. This is difficult for many, especially those that are used to DIY.
Loren Whitney, almost 10 years ago