Equity Based Services, Inc

by Troy Downing 

Generally, when we talk about Self Storage Real Estate Investments, the topic of tax sheltered income comes up. This is a great way of deferring taxes on a large portion of the income that a real estate investment makes. But what about growing and accumulating this income tax free?

Real Estate belongs in your retirement portfolio. This is a great asset that can balance your portfolio of stocks, bonds, and other asset types.

I am not a tax professional. I have to throw that caveat out. So, please discuss this with your tax professional before making any decisions.

Here are the general issues with holding real estate in your self-directed IRA or Defined Benefit Pension Plan.

First of all, the IRA has to be held by a trustee. There can be no co-mingling of funds or assets. There are a number of companies that offer these services such as IRA Resources in La Jolla, CA. The trustee will hold all of the cash and investments for you and make investments based on your direction.

In order to hold real estate in your IRA, the trustee must purchase the property within the IRA. In other words, you cannot transfer property that you already own into your retirement account. It is also a non qualifying transaction for you to sell property that you own into your retirement account. A retirement account can only be funded with cash or a rollover from another IRA.

Once you have set up an account with an administrator, they will handle all of the cash issues. They will pay for the purchase and will take possession of all of the cash generated from the real estate investment. The cash generated is not taxable and as it accumulates can be used to make other real estate or non real estate investments.

As per current IRS rules, the cash flow and appreciation that you accumulate in your IRA won’t be taxed until you reach retirement age and start to take distributions.

A couple of other things to think about with holding real estate in a retirement account. It really is best to have a third party management company run the real estate business for you. They should market, rent, pay the bills, and distribute the net cash flow to the trustee that is administrating your retirement account. There are a number of things that can cause problems if you don’t follow this route.

First of all, co-mingling of funds can cause problems with your retirement account. You don’t want to take personal possession of the income but rather keep all of the cash in a separate entity for the real estate investment and the net should flow directly to the IRA administrator or trustee.

You also have to be careful about paying for expenses and repairs out of your own funds as this may be considered a contribution to your IRA and is subject to penalties if the amount if over the IRS maximum yearly contribution.

Another advantage to using a third party acquisitions/management company for buying and running the property is that these companies will generally syndicate the ownership interests. In other words, you can own a portion of a larger property that you may not have been able to participate in otherwise. So, if you have $50,000 to invest from your IRA, a Tenant in Common syndication will allow you to participate in a much larger transaction, such as a 1% interest in a $5 million Self Storage facility.

To simplify all of this it’s usually best to put your trust in a third party to handle the acquisition, management, and disposition of the property.

To simplify, here are the basic steps for holding real estate in your retirement account:

1. Set up an account with a facilitator, such as IRA resources.
2. Fund your account with cash or rollovers from another IRA
3. Find an acquisitions/management company that will acquire and manage the real estate investment that you are interested in.
4. Direct your IRA trustee to allocate funds to the real estate investment and close the transaction
5. Relax until retirement.

Once again- I believe that this is a great way to balance a retirement portfolio, but please discuss the intricacies with your tax and investment professionals before making any decisions.

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