HUD Colorado

This section will be dedicated to providing information on how a growing number of Americans are finding out that their IRA money can be used to invest in real estate.

An IRA investment into property is a bit more complicated than mutual funds, but in a real estate savy area like Denver, many people may prefer investing their retirement in a real estate market they are familiar with rather than a stock market they are unfamiliar with.

Since the option of investing one's IRA into real estate is relatively unknown, we will be providing direction for people looking to take advantage of this growing market.

The opportunity begins with the process of switching their retirement account to a SELF-DIRECTED IRA.

Self-directed IRAs open the range of investments a person can make. Besides mutual funds, the U.S. Internal Revenue Service allows people to invest their IRAs in public and privately traded stocks, bonds, real estate, private notes and mortgages, secured and nonsecured loans, limited liability companies and limited partnerships.

The advantage of the IRA investment is that the transactions are tax-free or tax-deferred. Although there are big tax benefits to investing in real estate with a IRA, there are strict rules on the personal and financial relationship with the property as an IRA investment:

Personal contributions to an IRA investment are limited to $4,000 per year; however, cash within the IRA, such as profits from rents, may be used without limits to improve the property. Just like an IRA investing in mutual funds, profits cannot be withdrawn until the investor retires.

Because IRA contributions are limited to $4,000 per year, most clients invest money from rolled over 401 (k) plans converted to real estate IRAs. Another option to increase an IRA's buying power is for the investor to obtain a mortgage loan through the IRA.

With this type of loan, the mortgage is paid through the IRA's profits from the property. Every payment must come from within the IRA, and the IRS limits banks to issue only nonrecourse loans. A nonrecourse IRA loan means that the lender's ability to collect on the loan is limited to the collateral within the IRA and not the personal assets of the borrower.

The high risk makes these types of IRA loans harder to get, and the investor usually has to have a strong credit rating and some history in real estate. A few banks have established IRA lending programs that meet the IRS requirements. HUDColorado is accumulating a growing list of lenders, trustees, and third party companies that manage the property and handle rents. Contact us anytime for more information regarding these companies.

Once investors buy properties within their IRA, they can sell it at anytime without incurring taxes from each sale - as long as the profits stay within the IRA.

There can be an unlimited activity of buying and selling with no capital gains taxes. One hundred percent of the profits from the previous sale are there for the next buy.

When IRA real estate investors are ready to retire, they can sell the properties and then withdraw cash for retirement. With a traditional IRA, this retirement money is taxed as income, but it is taxed at a lower rate since the retiree now has less total income. With a Roth IRA, investors can pay the tax ahead of time and then get their retirement money tax-free. The incentive with a Roth IRA is that the investor pays the tax on the initial lower amount before the investment grows.

Once retired, the investor also can choose to move into the home that they were previously restricted from when it was within the IRA. The large one-time IRA distribution of the home to the investor, however, results in hefty taxes when compared to selling the home and slowly drawing money out.

*Most of this information is taken from an article written by DAVID CLUCAS, staff writter for The Boulder County Business Report, dated April 15-28, 2005. Contributions were also taken from an article as appeared in Professional Services of the Colorado Real Estate Journal, dated December 7-December 20, 2005.

As we continue construction of this web site, we will be providing more information on this subject. In the mean time, if you have questions regarding IRAs and real estate you can call John Hicks at 303-594-9962, or Joe Gallo at 303-888-1652.

*New direction for IRAs: real estate