You have your self-directed IRA set up, and after talking with your custodian from IRA Innovations, you’ve determined that you are interested in investing in real estate. You’ve even got your eye on a property that you’d like to potentially purchase.

But there’s just one problem. You don’t have enough money in your IRA yet to purchase the property outright, and you don’t want to get a non-recourse loan. The good news is that there is a great option known as partnering. This means that your self-directed IRA can partner with other investors and other IRAs to purchase the property.

The process of partnering to purchase real estate

  • Seek out potential partners. They could be friends, family members, co-workers, or business associates.
  • Perform your due diligence about your partners and the property to make sure you have the right investment and the right person. Have you confirmed that they do indeed have to necessary funds to make this happen?
  • Once you’ve got a definite partner, 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.

Here’s a specific example showing how it works with husband and wife team, Bob and Sylvia.

Bob opened an IRA account and decided he wanted to invest in a piece of local real estate, but he didn’t quite have enough funds in his account initially. Six months later, Sylvia opened her own IRA account that had the necessary funds to complete the purchase if the two IRAs were combined. Bob and Sylvia did partner their accounts and together they purchased the property for a long term holding strategy by renting it out. Bob invested $20,000 with his self-directed IRA (20%), and Sylvia invested $80,000 with her self-directed IRA (80%).

Monthly rent on the property was $985.50 with checks going into their respective IRAs: Bob: $197.10 and Sylvia: $788.40. All income went into their IRAs tax-deferred or, in the case of a ROTH IRA, tax free. All expenses to maintain or improve the property came out of their respective IRAs at the same percentage.

But wait? Isn’t a husband and wife team prohibited?

For those who are somewhat familiar with self-directed IRA investments, they often think partnering with family members is prohibited. While it does sound similar, we actually have two totally different scenarios based on who actually OWNS the property. If you, a family member, or other disqualified person own the property, then investing in that property with your IRA is prohibited. In the example above, if Bob or Sylvia had actually owned the property, it would have been prohibited. But they purchased the property from a third, unrelated party.

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. Remember that while a self-directed IRA can partner with anyone at the time of initial purchase, after the transaction is complete, the IRA cannot conduct any business with a disqualified person. Doing this could lead to significant tax penalties.

IRA Innovations provides self-directed retirement account administration and education. As the experts when it comes to “alternative” investments including private equity, they can provide the necessary tools and information to get started with a real estate IRA.