The Internal Revenue Code provides multiple tax deduction and deferment solutions for asset owners including Self Directed Individual Retirement Accounts (SDIRAs) and 1031 exchanges. Each option has its advantages and disadvantages, and the appropriate solution depends on the current asset ownership and the need for self-usage of the property.
SDIRAs have two primary advantages over 1031 tax deferred exchanges. First, the United States government allows the write off or tax deduction of any contribution for most IRAs. Second, when the SDIRA sells the appreciated asset, there is no tax due (unless purchased with a loan, then Unrelated Debt Finance Income (UDFI) or Unrelated Business Income Tax (UBIT) may apply), those profits are returned to the SDIRA. 1031 exchanges are the appropriate strategy when selling an investment property already owned and when debt is needed to acquire the replacement property. Disadvantages of a SDIRA are debt must be non recourse and there can be no self-usage of the property.
SDIRA Asset Types
SDIRAs have been around for over 30 years allowing individuals to invest in a variety of non traditional investments including:
- Single and multi unit homes
- Livestock
- Commercial property
- Improved or unimproved land
- Mortgage, note or accts receivable
- Foreign property investment
- Tax liens
- Gold or silver
- Private placements
- LLC and partnerships
Investments in collectibles such as artwork, rug or antique, metal or gem (the exception is gold, silver, platinum and palladium bullion), stamp or coin or any alcoholic beverage and insurance are prohibited.
Self-Directed Retirement Plans
The types of retirement plans that can be self-directed and the current contribution limits are:
| Contribution Limits | Contributions Taxed? | Withdrawals Taxed? | |
| Traditional IRA | $5k – $6k | No | Yes |
| SEP IRA | 25% of earnings to $49k | No (deductible to employer) | Yes |
| SIMPLE IRA | $10.5k – $13k plus employer match | No (company match deductible to employer) | Yes |
| ROTH IRA | $5k – $6k | Yes | No |
| Individual k | $46k – $51.5k | Your choice | Based on choice |
Rules & Regulations
SDIRA owners should follow three primary rules in their investment activities. First, there can be no self dealing or personal use of the SDIRA asset. This includes parents, grandparents, children or grandchildren of SDIRA owner and/or spouse. Brothers, sisters, Aunts, Uncles, Cousins can use the property at fair market rent. Second, debt must be non recourse to the SDIRA (the titleholder is the SDIRA) which limits the number of available lenders. Third, the SDIRA cannot engage in any transaction (direct or indirect) with anyone related or considered a disqualified person. Examples of disqualified persons include:
- You and your spouse
- Lineal ascendants and their spouses
- Lineal descendants and their spouses
- Any fiduciary of the SDIRA
- Anyone providing services to your SDIRA
- Corporations, partnerships, trusts, or estates in which you own, directly or indirectly, at least 50%.
Basic steps to buy real estate or asset in a SDIRA are:
- Open/contribute or roll over funds from an existing plan held with a broker to a SDIRA.
- Locate investment.
- Make an offer on behalf of SDIRA.
- Complete buy direction letter.
- Review and approve title documents.
- Deed recorded in SDIRA name for example, Entrust Freedom LLC FBO Client Name, IRA #12345.
- Expenses paid from SDIRA.
Regulations require that third party custodians provide SDIRA account administration including annual reports to the IRS. The Entrust Group is an old established administrator with competitive fees. They provide free consulting on the many rules and effective strategies such as holding the asset in a limited liability company with checkbook privileges.
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Thanks Andy for once again bringing self directed IRA’s back to the attention of investors. We have been selling land into SDIRA’s for years and find it a very effecient way to get the deal done when convential financing comes up a little short. With today’s stock market uncertainty, an SDIRA is something all investors should consider. That is where my retirement is. One more thing – regarding the “use” issue: Any prudent investor will take care of their investment (livestock must be fed, etc.) and land is no exception. A tree farm requires time spent on the land inspecting it, keeping up roads and firelanes and even cotrolling the wildlife populations to prevent damage to the timber stand, etc.
Hello Rick, SDIRAs are a valuable tool to invest and hold real estate. I agree with your view of self dealing that real estate holdings must be maintained. Often the question is whether a condominium can be used by the taxpayer and the answer is no. Thanks for your comment.
Great article. There are so many people that do not know about self directed IRAs and what they can do with them. Thanks for the post.