Traditionally, IRAs contain funds or individual securities, but it is possible to put other kinds of investments into these accounts, including real estate. There are rewards and potential risks with this strategy.
Real estate can be a great investment, and many people do not know they can also put property into their IRAs. However, they have to be careful: one small mistake and the IRA’s tax advantages can disappear.
What are the rules for a qualified real estate purchase?
+ You cannot mortgage the property.
+ You cannot work on the property yourself. You have to pay an independent party to do any repairs.
+ You do not get the tax breaks if the property operates at a loss. You cannot claim depreciation either.
+ All costs associated with the property must be paid out of your IRA and all income deposited into the IRA. This may become an issue if there is not enough cash in the IRA to deal with a major property expense.
+ You cannot receive any personal benefit from the property. You cannot live in it or use it in any way. It has to be strictly for investment purposes.
Any investment made by your IRA must be considered an arm’s-length transaction: You cannot use money in your IRA to buy or sell real estate to or from yourself or family members. You cannot receive any indirect benefit and you cannot pay yourself or a family member to be the property manager.
For a traditional IRA, you must take required minimum distributions at 70 1/2 and that applies with real estate as well. It can be difficult to sell real estate off in portions. How do you cover required distributions without cash? These are problems you need to solve before you start your retirement investing. However, you can roll over money from the sale of one property to the purchase of another without any tax consequences, inside the IRA.
Three more points to weigh when thinking about investing in real estate IRAs:
+ Your IRA cannot purchase a property that you currently own. IRS regulations do not allow transactions that are considered self-dealing. They do not allow your self-directed IRA to buy property from or sell property to any disqualified person — including yourself.
+ A real estate investment needs to be titled in the name of your IRA, not to you personally. All documents related to the investment must be titled correctly to avoid delays.
+ Real estate in an IRA can be purchased without 100 percent funding from your IRA. You can use undivided interest and partnering with others.
As discussed, there is a lot involved in holding real estate in your IRA, and it might not be right for everyone. Every situation is different. If you are considering holding real estate in an IRA, you should contact one of our CPAs to discuss your situation.