Case Study #1
The Facts
Bob has an IRA valued at $50,000 invested in CDs at a local bank and a 401k at his prior employer worth $100,000. He wants to purchase a building for $120,000 lot in a new subdivision. Bob expects to sell the property in 2 years as the area develops and lots increase in value.
Step 1
Consolidate the existing IRA and 401k into a new self-directed IRA with a new custodian.
Step 2
Bob makes an offer to buy the property naming his IRA as the buyer. He signs as custodian on behalf of the IRA. For example:
"ABCD Custodian IRA FBO Bob Smith Account # 123456789 ( Buyer)..."
Step 3
Copies of all paperwork are forwarded to the custodian with authorization to fund the transaction. Due diligence, title search, closing, etc. proceed as in any other deal and the custodian transfers funds from the IRA to an attorney or title company handling the closing on the required date.
Step 4
Bob forwards all related bills with authorization for payment to custodian (i.e. taxes, etc.) After two years Bob lists the property for sale. All sale proceeds are transferred back to the IRA (the Seller) tax protected.
Case Study #2
The Facts
Vicky has $500,000 in an IRA. She wants to buy a local office building listed for sale at $1,000,000. The building is fully rented generating good monthly cash flow. She wants to buy the property with 40% down and finance the rest.
Step 1
Transfer existing IRA into a new self-directed IRA with new custodian.
Step 2
Vicky obtains approval for a non-recourse loan for her IRA. The bank will loan the IRA $600,000 and the IRA will put up the other $400,000. IRA buys the property as in Case Study 1.
Step 3
Tenants pay rent directly to the IRA or a management firm on behalf of the IRA. Vicky directs the IRA custodian to make mortgage payments to bank.
Step 4
IRA is responsible for any building expenses such as: Repairs, Maintenance, Taxes, Insurance. Vicky authorizes the custodian to make these payments.
Step 5
The use of debt in this circumstance will cause the IRA to incur tax on a portion of it's income. The IRA must report this income and pay the tax using IRS Form 990T.
