For many investors, the best way to develop a multimillion-dollar portfolio is through a self-directed IRA. As the only retirement account that allows investors to include alternative investments in their portfolio, self-directed IRAs with real estate assets provide significant benefits, including tax reductions and various asset types.
But when using traditional investment platforms to buy and sell real estate within your self-directed IRA, you end up dealing with a host of issues. Redundancies, poor security, costly intermediaries, and lengthy transaction settlements can dig into your profits.
The good news is that technology has evolved and it’s possible to bypass these expensive challenges. Blockchain technology allows investors to invest in commercial real estate through digital securities, providing cost and time reductions.
What are real estate digital securities?
A real estate digital security is simply a digitized token that contains all of the information about a specific asset. These tokens are then can be bought or sold. Regulated by the SEC, digital securities for CRE are essentially the same as manual, paper-based securities certificates, except they offer many advantages.
From automatic and near-immediate settlements to greater visibility and security, digital securities are simply a more robust and flexible way to invest in real estate.
Self-Directed IRAs on the blockchain
Through using digital security tokens, we can invest in commercial real estate on the blockchain. However, it’s essential to keep in mind that cryptocurrency is not involved. Blockchain is simply the technology that allows for transparent and private trade interactions in real-time.
Using the Ethereum blockchain, we can also use smart contracts, which speed up trades and remove intermediaries. As a result, investors using self-directed IRAs can benefit from a multitude of improvements, including:
- Enhanced liquidity – Since transfers are automatic, we can efficiently list securities on regulated secondary market exchanges.
- Unparalleled transparency – Every single transaction is listed on the blockchain and cannot be rewritten. Combined with smart contracts that define workflows and parameters, stakeholders have unprecedented access to authentic data.
- Reduced Risk – Through advanced cryptography and software protocols, self-directed IRAs on the blockchain benefit from reduced security risks and accurate share of information.
- Eliminate Redundancies – Smart contracts and accurate data allow us to remove intermediaries and tie data to each digital instrument throughout its lifecycle. This aspect of the blockchain prevents costly redundancies and inaccuracies.
Rules for self-directed IRAs
Regulations for real estate in self-directed IRAs are the same, regardless of whether you are on the blockchain or not. Some of the standard rules are:
- You cannot purchase property that you own.
- You cannot benefit from your IRA investments outside of your IRA income.
- Your IRA investment should be properly and uniquely titled.
The good news is that these items are easier to manage on the blockchain. Due to the greater transparency and audibility, you are more likely to stay compliant and avoid potential fraudulent investments.
You still need to pay unrelated business income taxes (UBIT) and property taxes on your self-directed IRA income.
You will need to file UBIT taxes if the following are true:
- Income is derived from business activity.
- Business activity is not related to exempt status.
- Your organization regularly carries on business.
Getting started with a self-directed IRA for investing in commercial real estate is easier than it used to be. You simply need to choose a platform for digital securities, complete your application and KYC procedure, and then invest in real estate. The entire process is online, and you can invest in minutes rather than days.
Built on a private blockchain, Earn.re offers a robust platform for digital securities investing in commercial real estate. Through our private blockchain, we can reduce energy consumption, provide maximum protection, and provide a more cost-effective alternative to publishing on the main Ethereum network.
Through our advanced application, you can leverage digital real estate securities to grow your portfolio. Contact us to learn more.