By Anayat Durrani

The Ways and Means Committee is considering a major tax bill that has provisions that will directly affect real estate investors. The bill would impact accredited investors using self-directed IRAs to access real estate private placements. 

Per section 13812, Prohibition of IRA Investments Conditioned on Account Holder’s Status: “The bill prohibits an IRA from holding any security if the issuer of the security requires the IRA owner to have certain minimum level of assets or income, or have completed a minimum level of education or obtained a specific license or credential,” according to the bill.

The effective date is December 31, 2021 and has a two-year transition period for IRAs already holding these investments.

How the bill could affect Opportunity Zone investors

Adam Bergman, founder, IRA Financial, notes for example, the bill would “prohibit IRAs from holding unregistered investments that are offered to accredited investors, like equity or debt investments in small businesses or investments in private funds.”

Self-directed IRAs have provided investors an opportunity to diversify their portfolio outside of traditional public assets.

“My initial reaction is that if Congress restricts tax free investments by IRAs, investors will look for other avenues in which they can invest tax free, so this may have a positive effect on the demand for OZ investments, but difficult to say at this point,” says Daniel Altman, a partner in the tax group for Sidley Austin LLP.

Under section 138314, Bergman says additionally the bill would prohibit IRA owners from investing in (1) non-publicly traded entities where the IRA owner and related entities (including the IRA itself) own more than a 10% interest or (2) any entity where the IRA owner is an officer or director, regardless of ownership percentage.

“By way of example, single-member limited liability companies or any investment in an entity in which an individual is a director or officer could no longer be held in an IRA,” says Bergman. “IRAs holding any of the above investments would lose all of the tax advantages previously available to the IRA.”

Tax provision could prevent IRA investors to invest in Opportunity Zones

The two provisions in the aggregate will raise just around $1.7 billion over 10 years, Bergman says, and notes that the two provisions could have a dramatic impact on the ability of IRA investors to invest in OZs that are so important to the U.S.

“Since the majority of opportunity zone projects require one to be an accredited investor, Bill Section 138312 would prevent over $12 trillion dollars of IRA funds to be invested in Opportunity Zone projects,” says Bergman.

He says the Opportunity Zones provision is based on the bipartisan Investing in Opportunity Act, and will be greatly impacted should the provisions in the bill end up becoming law.

“Opportunity Zones are meant to spur investment in undercapitalized communities and this bill will severely limit the ability of millions of Americans to diversify their retirement portfolios and invest in very important projects helping millions of Americans,” says Bergman.


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