How Do I Buy Real Estate in a SEP IRA?


Investing in real estate via a Simplified Employee Pension, or SEP, may provide favourable tax treatment; however, there are certain limitations placed on how the property can be used. You may defer paying taxes on rental income until after you have withdrawn the money from your SEP account since qualifying real estate can be acquired with pre-tax monies via a SEP.

SEP-IRAs for Individuals

A simplified employee pension, or SEP, is a kind of individual retirement plan that is created for corporations. It enables a company to deduct the contributions from its taxable income while still contributing earnings to the SEP accounts of each of its workers. A SEP may be opened by people who are self-employed as well as owners of one-person businesses, and there is no need for them to worry about contributing to the accounts of other workers. Your SEP-IRA allows you to make yearly contributions of up to twenty percent of your earnings from self-employment. The highest amount that may be contributed in 2018 is $55,000. A typical Individual Retirement Account (IRA) is governed by the majority of the same laws that govern a Simplified Employee Pension (SEP).

Real Estate in a SEP

A custodian is required to oversee the administration of a SEP, just as they are for other IRAs. You need to find a custodian who is willing to let your SEP buy real estate if it is one of your goals for the account. A self-directed SEP account is one that gives the account holder a great deal of control over the kinds of assets that the account may possess. You must employ a one-person, self-directed SEP with a custodian who is either a property manager themselves or who has the ability to hire one in order to invest in real estate using a SEP. The transaction to close on the property is paid for using monies from the SEP, which are used by the custodian. You are not allowed to manage the property on your own since you are the owner of the SEP. This indicates that you are unable to personally collect rentals, maintain the property’s physical condition, or pay operating costs. To carry out these responsibilities, the custodian either serves as the property manager themselves or employs someone else to do so. You are not permitted, under normal circumstances, to conduct a company out of a SEP-IRA since doing so would provide you with a tax advantage over rivals who are required to pay taxes on current income. The Internal Revenue Service (IRS) levies an unrelated business tax (UBT) on the business revenue made by an IRA, which eliminates the tax benefit that a SEP offers. However, passive income from rentals is excluded from tax on unrelated company revenue; this implies that taxes on the income are postponed until it is removed from the rental property. Any other forms of revenue derived from the property are liable to be taxed as unrelated business income.

Benefits of SEP-Owned Real Estate

If you pay for the property in full with cash instead of using debt, you won’t have to pay taxes on revenue that isn’t tied to the loan that was used to fund the acquisition of the rental property. Because a SEP is an account that is exempt from taxes, you are unable to deduct any of the expenditures associated with holding the property, such as the initial purchase price, depreciation, property taxes, insurance, and any necessary repairs or upkeep. Because of regulations that prevent engaging in self-dealing, you, your family, business partners, and certain other “disqualified individuals” are not allowed to use, acquire, or reside in the property, regardless of whether or not rent is received. You are not permitted to utilise real estate that is held by a SEP as collateral for a loan.

Disadvantages of SEP-Owned Real Estate

A SEP cannot use debt to purchase rental property without triggering taxes on unrelated debt-financed income, which you can avoid by purchasing with all cash. Because a SEP is a tax-sheltered account, you can’t deduct any of the expenses of owning the property, including closing costs, depreciation, property taxes, insurance, repairs and maintenance. Prohibitions against self-dealing prohibit you, your family, business partners and certain other “disqualified persons” from using, buying or living in the property, whether or not rent is collected. You can’t use SEP-owned real estate as collateral for a loan.