Using Your Individual Retirement Account To Invest In Real Estate Source material is from an article written by Tom Lundstedt, CCIM. Used with permission A retirement account (traditional IRA, Roth IRA, Simple IRA, SEP, Keogh, 401K) is a special account that holds your investments. It can hold many types of investments, such as mutual funds, stocks, bonds, and real estate. What are the benefits of investing my IRA in real estate? - Avoiding the volatility of the stock market, but earning higher returns than bonds, certificates of deposit, or other “low-risk” investments.
- Done right, can be a fairly low-risk investment. Research, analysis, and competent advice are key to success.
- The profit from your real estate investments would be taxed if you owned these properties personally. However, if your real estate IRA buys, owns, and sells the property, the profits would compound in your IRA tax-deferred (or tax-free if it is a Roth IRA). There is a limit to how much you can contribute each year to your retirement account, but no limit on how much the account can earn.
How do I get started in using my IRA to invest in real estate? This article is intended to only to introduce the reader to the subject of IRA real estate investments. The whole matter is fairly complicated, and anyone unversed in the ins and outs must first seek out competent advisors. Secondly, one would establish a self-directed retirement account with a company/custodian that specializes in real estate IRAs. This is a relatively easy process and can be done by either establishing a new account or rolling over the assets of an existing account. The third and final step in getting started is to identify properties for purchase, keeping in mind what you can do and what you can’t do with a real estate IRA. For instance, it is the self-directed IRA that buys and sells the property, not you personally by withdrawing money from the account. At your direction, the custodian buys/sells the property in the name of your IRA. What can I do with a real estate IRA? - Your real estate IRA can buy and sell many types of real estate, including raw land, rental properties, condos, fixer-uppers, commercial properties, etc.
- The property can be rented out, but the rental income is paid into your IRA rather than to you.
- All the expenses of maintaining and operating the property must flow in and out of your self-directed real estate IRA. Because of this, your IRA must have enough liquid reserve funds to cover operating expenses, improvements, etc.
- It is possible to finance a property that is owned by your IRA, but the financing must be “non-recourse.” This means that the property, and not the IRA account, is the sole security for the loan.
- Your real estate IRA can purchase a partial interest in a property. Your IRA can be a partner in a real estate investment with a fractional interest if your IRA doesn’t have enough money to purchase 100 per cent interest.
What can’t I do with a real estate IRA? - Your real estate IRA cannot buy a property that you, your spouse, or certain family members already own. Similarly, your real estate IRA cannot sell a property it owns to you, your spouse, or certain family members.
- You, your spouse, and certain family members cannot have any personal use of the property owned by your IRA.
- Your IRA cannot lease the property to your business. Your business cannot use or occupy any part of the property.
The question of whether a real estate IRA is right for you depends on your personal situation and the particular real estate investments available to you. Your real estate IRA cannot own property that is used by you, certain family members, or your business. Therefore, your primary residence, your second and/or vacation home, and your business real estate are not candidates. In addition, a commercial or residential rental property that produces a significant tax shelter from depreciation deductions would probably not be a good candidate because the tax savings would not be utilized by your retirement account. However, raw land (no depreciation deduction) and fixer-uppers (low basis, therefore limited depreciation deduction and a good gain on the sale) are excellent candidates, and many rental properties are good potential candidates (you have to run the numbers, get professional advice. I would be happy to help you evaluate your choices in real estate properties. Contact Vince Hoehn). For more information on buying, owning, and selling investment real estate, visit the “Products” section at www.tomlundstedt.com |