Can I purchase real estate with my IRA?

Can I purchase real estate with my IRA?

What is a self-directed IRA? In 1974, the IRA was born out of ERISA (the Employee Retirement Income Security Act).  While most people invest their IRA funds into mutual funds, stocks and bonds; there is another option.  An option that gives the investor more control over their return.  With a self-directed retirement account, you can buy real estate, notes, private equity, precious metals and many other types of assets.

Today’s focus is on the purchase of real estate.  The added benefit of real estate is there are no limits on the type of real estate.  An investor can purchase a variety of properties, such as commercial buildings, vacant land, condos, mobile homes and apartment buildings. Real Estate is and always will be a tangible asset.  Should we see a decline in the economy, that asset will always be there when the market recovers.  With the help of a custodian to manage the asset, a real estate advisor and a tax accountant, this is very doable for most people.  With the availability of nonrecourse lenders and/or having an IRA partner an investor can invest their retirement funds and there is no need to have 100% of the purchase price.

It seems all good things are complicated, right? Well due to IRS Code 4975, there are some very stringent rules to be followed, making this a bit more complex. Don’t let the complexity of a Self-Directed IRA steer you away from starting one.

Can I use my investment property as a second home?  No, the property can only be held for investment purposes only.

Can I sell the property to myself?  No, the direct or indirect furnishing of goods, services, or facilities between an IRA and a “disqualified person” is prohibited.

The definition of a “disqualified person” as per IRS Code Section 4946 is a spouse, ancestors, children, grandchildren, great grandchildren and spouses of children, grandchildren and great grandchildren.  All lineal ascendants and descendants.

Do I need a property manager?  No, it is not required.  There are advantages and disadvantages to managing your own property.  If the account owner manages the property, no rent income can be deposited into a personal account and the account owner can’t pay him/herself to manage the property.

I am a contractor; can I rehab the property with my own IRA funds?  No, because of the “disqualified person” rule.

Can my kids live in the home that my IRA owns and pay rent?  You cannot buy a house or vacation property for you or your lineal ascendants or decedents to use while your IRA owns it.

Can I do my own repairs?  No, because you are considered a “disqualified person”

Can I get a personal loan on the property that my IRA owns?  No, using an IRA to secure a personal loan is a prohibited transaction and referred to as “self-dealing”.  Everything the IRA engages in must be for the exclusive benefit of the IRA.

All income and expenses are sent to the custodian who process rent checks and pay any invoices or bills.  The custodian will prepare the year end tax statements.  If the account holder is over 59 ½ a percentage of the asset or rent income can be distributed to the account holder as retirement income. The custodian will process the tax statements reflecting the distribution at year end.

Real Estate has proven to be a good investment and will continue to be a good investment.

As your trusted Real Estate Advisor and Enrolled Agent, let me help guide you through the process.

Call me with questions,

Melissa Zimmermann, EA, Broker Owner

An Investment You Can Live In

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