Tax issues

Considering Commercial Property Investments with an IRA

By Daniel Cordoba, CEA |

With today’s fierce competition in the commercial real estate world, it’s important to find a way to distinguish oneself as a professional. Having a specialized knowledge of inventory possibilities and ideas for creatively funding investment projects can set you apart as a broker, financial planner, or lender.

The inconsistent performance of the stock market in recent years has made commercial real estate a prime target for investors. This shift in investment focus has helped fuel the commercial real estate market. In addition, the ability to use retirement funds, which might otherwise be sitting idly or making marginal returns on stocks and bonds, gives real estate investors the ability to diversify and makes congregating money considerably easier for financiers and builders. All types of commercial properties can be held within individual retirement accounts, if the transactions are structured according to Internal Revenue Service guidelines.

Flexibility is one of the main reasons investors use self-directed IRAs for real estate transactions. A property can be acquired quickly, with the required fees and costs being directly paid for from the IRA. Several other ways investors can benefit from using IRAs to purchase commercial real estate are listed below.

Tax Benefits

Investors who use their IRAs to purchase commercial properties that generate excellent cash flow and appreciation can gain a number of favorable tax benefits. In the case of Roth IRAs, which are funded with after-tax money, investments are not taxed while growing and are tax-free upon distribution. In addition, Roth IRAs have no minimum distribution, so investors can decide when and how much to take as distributions. Traditional IRAs are funded with pre-tax money and are taxed at the time of distribution.

Unlike 1031 exchanges, when buying real estate with IRAs there are no specific investment time or like-kind requirements to prevent being taxed on the purchase. Finally, when the property is sold, the IRA prevents any capital gain exposure since taxation of an IRA does not occur until distribution.

Greater Control and Protection

Structures available today make using self-directed IRAs easier, safer, and less expensive. A specially structured limited liability company compliant with IRS regulations, known as an IRA LLC, allows investors to maintain checkbook control of their accounts, meaning they can write checks for the investment more freely. An IRA LLC speaks directly to investors’ ability to control the disbursement of funds and reduce fees paid to custodians, since they do not have to rely on custodian approval or pay a fee for each check written. By nature, the IRA LLC also legally provides an added layer of asset protection.

For example, when the Juraks of Dallas funded the purchase and development of a property in St. Croix, having complete control of their IRA funds was absolutely imperative to allow them to make deposits and improvements. In contrast this transaction would not have been allowed by many self-directed IRA custodians who wouldn’t want to deal with international investments. The transaction costs and custodial requirements also may have been high, and dealing with the custodian intervention may have been too cumbersome for the business owner and his family. Therefore, the use of an IRA LLC became a crucial tool in giving them control and leading to their successful investment.

Important Considerations

The IRS has established strict rules regarding investment in real estate with a Roth or other type of IRA, so it is not something that investors should undertake alone. Investors and people in the commercial real estate industry should partner with someone who can provide expertise in this area. For people in the industry looking to invest or to help others to invest in this way, these are some considerations to keep in mind:

Someone with extensive knowledge of self-directed investments should be sought out to implement advanced methodologies and provide solid advice. The adviser must supply support and education to put together all the pieces of the self-directed IRA puzzle, enabling the investor to see the big picture and make the most educated investment decisions.

It is not permissible for an IRA custodian (versus a self-directed IRA adviser, or other financial adviser) to offer advice. By law, custodians must maintain a neutral position and only can convey the IRS regulations and their firm’s investment policies; they cannot offer advice on transactions. Usually, the investment firm that holds the traditional IRA investments is not in a position to offer advice on self-directed IRAs.

Checkbook control can be afforded by creation of an IRA LLC. An IRA LLC is not a regular LLC; rather it is an investment vehicle compliant with IRS code, which provides the investor with the ability to write checks against self-directed IRA funds so he or she can act quickly, as well as provide the benefits mentioned above.

People in the commercial real estate industry looking to partner and investors themselves should look for a company with the knowledge to provide protection against creditors and litigation, through increased overall asset protection with an IRA LLC.

Investing in real estate and other non-traditional assets with an IRA is greatly simplified by having the right individuals on hand. A reputable self-directed IRA adviser will have attorneys on staff who can provide accurate information and flexible tools to satisfy individual investor objectives. A very important consideration is the self-directed IRA firm’s compliance with circular 230 IRS requirements, which demand that individuals and/or firms that offer tax advice provide accountability to their clients and to the IRS itself.

With the advantages that non-traditional IRA investments enable -- including greater control over investment options, tax favorable income, and higher returns with less risk potential -- they can be a highly valuable retirement vehicle for investors of all levels.