Should You Use An IRA to Buy A Net Lease Property?

Jun 19, 2018

Many people tend to think the money in their retirement portfolio is locked up as tight as Fort Knox: once it goes in, it stays in, until retirement.

The truth is that you don’t like the returns you’re getting from traditional stocks and bonds, you’re free to withdraw your money and put it in an investment that makes it likely to yield higher returns.

Why Would An Investor Move Money From A Retirement Portfolio?

The truth is that the performance of the stock market over the years has led people to realize that the market is much more volatile than they ever anticipated.

Many investors feel more secure owning an investment they can actually see and touch – one that over the long term, continues to perform exceptionally well.

Commercial real estate is just such a market.

When a stock plummets, there is really very little you can do about it.

However, when the market for a particular type of property or in a specific area gets rocky, there are always options. For example, investors have the option of using value-adds to improve the value of an average property, increasing returns.

If a retail property fails to prosper, investors can use a number of techniques to improve the quality of tenants, capitalize on local and market trends to increase traffic to the property, or add service-based tenants to the tenant roster.

The good news is that all types of commercial properties can be held in an individual retirement account, as long as the transaction follows the rules set out by the IRS.

By using a self-directed IRA to fund commercial real estate transactions, you can quickly purchase a property. As a bonus, any fees or extra expenses come out of the IRA instead of your pocket, making a self-directed IRA a win-win proposition.

Tax Benefits Of Using An IRA To Purchase Commercial Property

tax benefits of using an IRA to buy commercial property

Although commercial properties are a great way to increase your cash flow and gain value over the long term through appreciation of the property, there are several tax benefits as well.

  • ROTH IRA’s aren’t taxed since they’re funded with after-tax money. Unlike traditional IRA’s that are taxed when money is withdrawn, ROTH IRA’s have no minimum distribution, so as an investor, you get to choose when to take out money, and how much.
  • There is no time limit on when you can buy a property when you use a self-directed IRA. Take as long as you need to find the property that fits your investment goals: you’ll still get the same tax benefits.
  • No need to worry about capital gains taxes either; IRA’s aren’t subject to taxes until money is withdrawn. And if you use a ROTH IRA, you can get out of paying taxes on profits entirely.

Self-directed IRA’s Are Safer

Because the IRS allows you to use an LLC, or a limited liability company, to control funds, investors can easily pay for any expenses resulting from their investment property.

Investors don’t need to rely on a custodian for approval of withdrawals, nor do they need to pay a fee for writing checks. Plus, because the LLC is considered a separate entity from the investor, the investors’ personal assets cannot be seized in the event of a bankruptcy or other unfortunate event.

How To Use Your Self-Directed IRA To Buy Investment Properties

using an IRA to buy investment properties

Here are a few things you should specifically consider if you think using an IRA to buy investment properties could work for you.

You must buy a Business Property

An IRA can be used to buy a commercial property. You cannot use it to buy a personal property in any shape or form. It also must be a property you have purchased straight from the funds within the IRA, instead of a property that you presently own.

There are specific regulations about how to purchase a commercial property, but basically, the first step you would take is to open an IRA custodial account.

Next, you’d transfer the cash from an existing IRA custodial account or a 401K (in some cases) into that account. Your best bet is to get help from an experienced accountant in order to help you carry out the funding, property purchase, and managing of the account.

All Profits go Back into the IRA

All income made from the commercial property goes straight back to the IRA since the IRA – not you – is the owner of the income property. Because of this fact, the IRA will also pay any expenses such as maintenance, insurance, and property taxes, incurred by the property.

You Need to use a Non-recourse Loan to Purchase the Property

If you’re not paying for the investment property in full, you are required to secure a non-recourse loan for the property. That’s because the IRA, not you the investor, holds ownership of the property, which means you can’t be held liable in the event of loan default.

If the loan does go into default, the lender will seize the property, since this would be like extending credit to you, the investor.

This is also why most investors prefer to avoid issues by opening up a separate IRA when taking a non-recourse loan.

In addition, since lenders require the commercial investment property must have a high enough cash flow to mitigate the risk of default, as well as a higher LTV percentage – usually 50% of the total purchase price.

You will not be able to Capture Depreciation

One con of owning a commercial property through a self-directed IRA is that you can’t capture depreciation on the property.

Investors use depreciation in order to lower the taxes on a property. For commercial property, the length of time for depreciating property is 39 years. By dividing the purchase price by 39 years, you’ll get the amount of money you can deduct on a yearly basis.

Despite this, there are using a self-directed IRA to purchase a commercial income property has numerous advantages. Still, remember that for a stable retirement portfolio, it’s important to diversify your assets.

Talk to a broker to find out how to use a variety of commercial real estate properties to diversify your portfolio based on your risk tolerance and your investment goals.

Looking To Buy Commercial Property?

Find out why triple-net lease real estate investments should be part of your investment portfolio.