Self Directed IRAs for Physician Real Estate Investors

Physicians, like many high-income professionals, face the overwhelming burden of taxes. In fact, we often fall into a high tax burden. And, Investing in real estate is a unique tool that can help keep more cash in your pockets. Most of us have or are familiar with an individual retirement account (IRA). Typically, IRA accounts are made up of a mix of investments such as stocks, bonds, mutual funds, ETFs, CDs, etc. However, did you know that physician real estate investors can invest in real estate using a self-directed IRA? Actually, self-directed IRAs allow you to invest in all kinds of investments not typically available to your typical IRA accounts. For example; real estate, precious metals, tax lien certificates, private lending notes, and more.

But, for the sake of this article let’s talk about how a self-directed IRA may allow you to tap into a lot of cash you thought was out of your control until you take distributions at age 59 1/2. And, let’s be honest I like control. unique financial challenges and opportunities. One investment strategy that has gained popularity among physicians is utilizing a self-directed Individual Retirement Account (IRA) to invest in real estate. While this approach offers several advantages, it’s important to consider the potential drawbacks as well. In this blog post, we’ll explore the pros and cons of physicians using a self-directed IRA for real estate investments.

What is a self-directed IRA?

A self-directed IRA is similar to a traditional or Roth IRA. However, it is held by a custodian that allows you to pick what you want to invest in. For example, real estate. A custodian is a company that executes the investment directions from the IRA owner. They also perfomr the administrative and holding duties that are necessary to preserve the tax-deferred status of your IRA account. Now, before we dive deeper into self-directed IRA let me say I am not a tax or legal professional or expert and am not a CPA so consult one.

Pros of Physicians Using a Self-Directed IRA for Real Estate Investments:

Tax Advantages

By using self-directed IRAs, physicians can enjoy tax-deferred or tax-free growth on their real estate investments.

A Traditional IRA is tax deferred-which means you get an income tax break by putting money into this IRA account. This money grows tax-deferred, but you pay taxes when you withdraw from the account. So, basically, you pay taxes in retirement when you withdraw.

A Roth IRA account allows you to contribute after-tax money. So, you pay tax upon putting money into your account and this allows your account to grow tax-free. There are no taxes due upon withdrawal. So simply, you are taxed when the funds go into the account and not when they come out. Any rental income or capital gains generated from the property are typically sheltered within the IRA until distribution.

Access to Capital

How many of us have IRAs that we have forgotten about, have no idea what they are invested in, or frankly don’t care? Probably a lot. Did you know that as of the first half of 2021, $13.2 trillion in assets were sitting IRAs. A big concern physicians have for real estate investing is how much is needed for a down payment for an investment. Well, you have the ability to take the funds in your IRA getting minimal returns and use that to invest in real estate. Incredible!

Diversification

Investing in real estate through self-directed IRAs allows physicians to diversify their investment portfolio beyond traditional assets such as stocks and bonds. Real estate can provide a hedge against market volatility and potentially deliver consistent income streams. You can use your self-directed IRA to invest in many different real estate asset classes.

Control and Flexibility

With a self-directed IRA, physicians have greater control over their investment decisions. You can choose the specific properties you want to invest in, negotiate deals, and manage your real estate investments directly through the custodian.

Potential for Higher Returns

Real estate investments have the potential to generate attractive returns, especially when carefully selected and managed. Real estate has many advantages and does tend to outperform the stock market long term. Especially, when you take into account all the benefits of real estate investing.

Asset Protection

In many states, assets held within a self-directed IRA are protected from creditors. This means that in the event of a lawsuit or bankruptcy, the real estate investments held in the IRA may be shielded from potential claims. Again, I am not an attorney. But, it is always good to protect your ass(ets).

Cons of Physicians Using Self-Directed IRAs for Real Estate Investments

Complex Regulations

Self-directed IRAs come with complex rules and regulations that must be followed strictly. This is where custodians can help. Part of your asset management fee is used to make sure your self directed IRA follows the rules of the IRS. Physicians must ensure compliance with IRS guidelines to avoid penalties, disqualification of the IRA, or potential tax consequences.

Regulations for Real Estate IRAs

Buying real estate in a self-directed IRA is different than buying it in your personal name. This is not necessarily a con but, is certainly a learning curve

Property Title

This is held in the self-directed IRA and is owned by the account and not you personally. This means that the tile documents are in the name of your IRA and not your personal IRA. But, do not worry it is still your property but it is held in the IRA

Expenses and Income

All of the income (yay) and expenses (nay) flow through your real estate IRA. This includes rental income and of course, property taxes, utility bills, repairs, and other expenses are paid solely by the IRA account. The rental income is deposited into and remains in that account.

Limitations of use

Your real estate property is purely an investment. It is not your vacation home, a place for kids to live, a second home, etc. Your spouse, parents, grandparents, great-grandparents, children and their spouses, grandchildren, service providers of the IRA, or any entity that owns greater than 50% of the property is considered a disqualified person by the IRS and cannot live in or obtain benefit from that home. This gets nuanced so read more here!

Limited mortgage opportunities

So, you. can take out a mortgage on a home held in your self-directed IRA but this is tricky since the home is owned by the IRA. You have to shop around for specific banks that do this and founding the right non-recourse IRA loan lender is difficult but not impossible.

Material participation restrictions

This is tricky. You cannot do anything personally to fix or maintain a property owned by your IRA. Instead, you must hire someone to do anything and everything for you and pay them with funds directly out of your IRA. This is why IRA’s are great for private lending investing or ingesting in syndications because you are likely removed from paying a service provider and. aren’t responsible for maintenance on a property.

Depreciation benefit loss

The benefits of depreciation are lost when you hold real estate properties in your IRA. However, you do get tax-free income benefits to offset this

Heavily regulated and complicated

Honestly, self-directed IRAs are great real estate investment vehicles but they are complicated and heavily regulated. The SEC heavily regulates all retirement accounts and has pages fo rules to follow. A good custodian will help navigate this and certainly using a professional is going to be helpful. Also, with all these regulations and rules comes more fees and paperwork. It is not free to have a self-directed IRA so you will want. toshop around

Contribution Limits

Luckily, you can typically take a current traditional or roth IRA and roll those funds into a self-directed IRA. However, if you are just getting started funding an IRA it may take some time to build up a nest egg. As of 2023, you can only contribute $6,500 per year if you are less than 50 or, $7,500 per year if above age 50.

Overall, using self-directed IRAs to invest in real estate is a very attractive option. Oftentimes, this opens up a whole other stream of capital to use to purchase real estate that may have been forgotten. We have found that the least complicated ways to invest in real estate with a self-directed IRA is to privately lend money. For example, if someone is raising money for a real estate deal you loan then the money and they pay you back into your IRA with terms of your choosing. Also, using the IRA to invest in syndications can be less complicated than owning a whole property in your self-directed IRA.

Again, consulting with financial advisors, attorneys, and tax professionals who specialize in self-directed IRAs can provide valuable guidance to help physicians make informed decisions and navigate the intricacies of this investment strategy effectively.

Have you used a self directed IRA? Let us know in the comments! Also, if you are interested in using your self-directed IRA to buy some residential assisted living properties with us please reach out on the contact page!

Disclaimer: The information provided in this blog post is for general informational purposes only and should not be construed as financial or investment advice. Physicians are advised to consult with their own financial advisors or tax professionals before making any investment decisions or engaging in self-directed IRA transactions.