Many buyers do not have a self directed IRA or they work with a custodian who imposes their own investment restrictions. Most of these restrictions have nothing to do with the actual code governing retirement accounts but are instead employed to make life easier for the custodian. Actually, the rules governing the ownership of real estate are very simple. These are the

• office buildings

• single family dwellings

• multi-family dwellings

• apartment buildings

• improved land

There is no type of real estate you cannot own beyond the general rules governing prohibited transactions.

Prohibited Transactions and Self Dealing

The IRS has some rather simple and straightforward rules that define what one cannot do. A simple rule of thumb is your retirement plan is meant to benefit you at retirement and not before. You may not, directly or indirectly, deal with yourself or a disqualified person. The term deal with yourself means you cannot lend money, extend credit, furnish goods, services or facilities to yourself or a disqualified individual. Subsequently, it is permissible to invest in real estate as a future investment, as opposed to for current use.

Currently, this is an important part of this puzzle. Let’s assume you have found your dream retirement home or the piece of property you would like to build on. This can be inside the United States or abroad. On the day of your retirement you assume ownership of the property for your personal use and benefit simply by assuming possession, in effect, taking it as a distribution of your plan. You would be taxed upon whatever the value is at that time. Of course, you could sell the property outright at any time, as well.

Other Requirements and Restriction s

• you may not purchase the property from yourself

• it may not be purchased from family members, except for siblings

• neither your, one of your business ventures not any family member may lease or live in any investment property owned by your plan

• only retirement funds may be used as the down payment or good faith deposit

• the title must be in the name of the retirement account

• you may have fractional ownership of a property

Disqualified Persons

• the combined voting power of all classes eligible to vote

Exemptions

One of the most exciting aspects to this area of investing is there are 10 government approved blanket exemptions to the prohibited transactions described above. These exemptions have been granted in areas that seemingly contradict the self dealing provisions of the code. In one exemption, a retirement plan was allowed to purchase the mortgage for the participant’s primary residence with plan assets. In a second, plan assets were used to purchase the existing mortgage on a property currently being used for the participants business. You too can make use of these blanket exemptions by allowing the government approved process.

Conclusion

Find the dream property you always wanted and purchase all or part of it with your retirement assets and eventually take ownership of it. All of this can be done legally and in full compliance with the IRS code.

Property Ownership

There are a number of ways to actually purchase real estate. You may own the real estate fully or fractionally with other entities or buyers. You may purchase an option on a real estate or by using a land trust, a stockholder corporation, a limited liability corporation or a similar entity. The property may be paid for fully by using retirement assets or may be financed. If the property is financed, you must ensure it is structured correctly to avoid any adverse tax consequences. The down payment must be paid for by the plan and all future payments must come from the plan assets, new contributions and/or income the property may produce.

Again, the property may be fractionally owned by the plan but the down payment and an equivalent amount of the ongoing payments must come from the plan. The instructions as to how this is accomplished are included ad verbatim in the next section from a custodian who allows these types of investments.

Special Instructions

If you wish to purchase real estate and you do not have sufficient funds in your IRA, your IRA may incur debt. This debt mortgage must be in the form of a non-recourse note loan. The only recourse for default of the loan is the underlying real estate property. A non-recourse loan may be obtained from a lending institution, a private buyer or the seller of the property. The loan may not originate from you or any family member that is of direct linear descent (i.e. grandfather/grandmother, father /mother, husband/wife, son/daughter etc.). You may not personally sign for the loan.

Property Management

As a result of a recent tax ruling, some custodians will now allow you to act as your own property manager. You may collect a reasonable fee for this service from your retirement plan. You will receive a 1099 at the end of the year for these fees. Any income from the property must be returned to the retirement plan as a profit of the plan, less any expenses incurred. The plan assets may pay administrative and record keeping expenses as well. Conversely, you may hire an outside property manager to perform this service as well, provided they do not fall under

the disqualified persons definition.

What To Do?

There are two critically important keys to this process in order to maintain the integrity of your retirement plan. You must work with a qualified custodian who understands these issues and allows you to make these types of investments. We have identified and established relationships with several custodians who specialize in this area. Secondly, it is equally important to work with a qualified advisor, like myself, who understands this process and can assist you in making these types of investments in a timely, smooth and compliant fashion.

Fees

The fees vary somewhat depending upon the type of transactions you are considering and the transactions structure. In general, the fees are as follows:

• account establishment cost US$100 (includes 1st year’s annual fee)

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