Buying Real Estate With Your IRA

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Category: Individual Taxes

Written by Jonah Sparks

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Current economic times make it wise to seek out non-traditional methods to save for your retirement. One particular method is increasing in popularity. More and more people are using the self-directed IRA to purchase real estate.

A self-directed IRA is probably the lesser known of IRA options. It requires you to make active investments on behalf of the plan. To open this type of IRA, you must hire a trustee or custodian to hold the IRA assets. This person will also be responsible for administering the account and filing required documents with the IRS.

As with other IRA accounts, you may chose to invest in stocks, bonds and mutual funds. However, you also have the option to invest in things that most investment houses don't offer. Things such as small businesses, boat slips, storage units, parking lots, land and homes.

Experts agree that in general, real estate can be a good long-term investment and generate higher returns than the stock market.  However, you should remain cautious. The wise investor will spend some time getting organized and doing their homework. Using a self-directed IRA to invest in real estate makes the most sense when you fully understand the requirements involved.

Consider seeking legal advice as well as input from an accountant and real estate agent to obtain as much information as possible. Be familiar with the rules for the type of IRA you’re using. Regardless of the type, contribution limits still apply, and there are penalties for early withdrawals.

Keep in mind a few things as you consider investing in real estate through a self-directed IRA.

• It takes time. Build a timeline to help you plan accordingly. Assume that it will take two or three weeks to open an account at a typical brokerage firm. Remember that you also need to find a custodian. The down payment must come from IRA funds, which means that rollovers may be required.

When a real estate investment is contracted, you will review and sign the purchase agreement. Then your custodian must approve it and release funds to the title company. All of these steps take time.

• You can’t take advantage of IRA investments until you retire. You won’t be able to use the fund to pay off your mortgage. In addition, you may not live in or use the property you buy as an investment in the self-directed IRA. Presumably, you’re buying a property because it will appreciate in value. Be advised that you lose the depreciation tax deduction that you would otherwise receive in a traditional investment property.

• Your spouse, immediate family or companies in which you have a 50% interest cannot be involved. An IRA is an individual account and you want to avoid conflicts of interest.

• It’s a lot of work. Be fully informed regarding the reporting and administrative requirements for using this type of IRS to buy real estate. You should not be doing work on the property. All expenses, maintenance, taxes and insurance must be paid from the IRA. The same applies to any association dues or membership fees. Realize that finding reliable tenants and contractors will take time. Lastly, keep in mind that every payment paid from the IRA must be approved by your custodian.

• All income from the property is tax deferred, including rental income and capital gains. Obviously, this will be very beneficial if you will be in a lower tax bracket at retirement.

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