BiggerPockets

How To Invest In Real Estate With Your Ira

It's a little-known fact that you can invest your tax-deferred or tax-free retirement funds in real estate. In fact, you can invest your retirement funds into nearly anything. The internal revenue code specifies only what an IRA cannot invest in, and those things are life insurance and collectibles. This leaves your investment choices wide open for the most part.

Increasing numbers of people are discovering the many benefits of investing in real estate with their retirement funds. Like returns from securities investments, the returns from an IRA real estate investment are realized tax-deferred in the retirement account, but unlike stocks and bonds, real estate is a tangible investment which the investor can see and have a direct hand in appreciating its value.

SETTING UP YOUR IRA.
To invest in real estate with your IRA, you must first create an account that supports investments in non-traditional assets. These types of accounts are commonly known as self-directed IRAs.

SELF-DIRECTED IRA'S WITH A SELF-DIRECTED CUSTODIAN.
These companies act very similarly to your existing IRA custodian, but they allow non-traditional investments. Self-directed custodians hold your IRA funds in their accounts and direct those funds on your behalf when you wish to make an investment. For example, if you decide to purchase real estate with your self-directed IRA, you will apply for an investment through the custodian. Approval for this investment can take a matter of days or weeks, depending on the custodian with which you work. Once the investment is approved, the custodian issues a check directly to the seller for the purchase of the property.

SELF-DIRECTED IRA'S THROUGH A SELF-DIRECTED IRA/LLC.
These accounts start out similarly to self-directed custodial accounts, but go one step further. Companies that offer self-directed IRA/LLC services will transfer your funds to a self-directed custodial account with a preferred partner, typically at a dramatic annual-fee discount. They will then prepare a customized limited liability company (LLC) on your behalf. The self-directed IRA/LLC company will then direct your retirement funds into the LLC. You can then readily access these funds through the LLC bank account.

Most self-directed IRA/LLC companies will instruct you to open a checking account for the LLC, which will enable you to make investments instantaneously. This means that once you have decided which property you wish to purchase as an IRA investment, you will simply purchase the property in the name of the LLC and will write a check directly to the seller from the LLC bank account.

BUYING REAL ESTATE AS AN IRA INVESTMENT.
Whichever account you establish, the process to purchase a piece of real estate as an IRA investment is fairly simple. You must make the purchase in the name of your IRA or in the name of the LLC, and you must pay for the property with IRA funds.

AVOIDING PROHIBITED TRANSACTIONS.
When investing in real estate with an IRA, one should be careful to avoid prohibited transactions. Although IRS Code only bars your IRA from investing in life insurance and collectibles, it has additional provisions in place to keep you from gaining any personal benefit from your IRA investments before you reach the age when the government says you can start taking penalty-free distributions (age 59 1/2).

One such prohibited transaction is that the IRS mandates that you cannot invest with any "disqualified parties." Disqualified parties include yourself, any direct ascendants or descendents (i.e., parents and children), your spouse, spouses of your descendants, and people with a fiduciary responsibility to your account (i.e., accountants and financial advisors).

Because of these restrictions, you could not buy a home with your IRA that you would live in or that would be rented out to your grandparents. The IRS has put these codes in place to make sure that your IRA money is used for investment purposes only. Luckily, even with these restrictions in place, there are limitless opportunities for arms-length transactions that will help grow your IRA.

Comments

• 

  Sheldon Harding — over 2 years ago

  Great article and I wish you much success in educating the public on this issue of IRA investing in real estate. You can also add some non-recourse debt financing to the property. You do have to do an extra tax return (I can help), but if you pay off the debt a year before sale, you still can be free of capital gains taxes.

• 

  Sheldon Harding — over 2 years ago

  I also wanted to mention that with everyone able to convert to ROTH IRA's next year, you will be able to purchase properties with ROTH $ and then not only do you get no capital gain on sale, but you also get no tax when you withdraw money after the 5 years / age 59 1/2 rules are met. This alone is a good reason to start a ROTH IRA as soon as you can in anything. Once the 5 year rule is met, it is met on all your ROTH IRA accounts.

• 

  Lynda Duke — over 1 year ago

  I live in WA State and have a self direct d IRA, I want to invest in Trust Deed/ Notes but I'm being told WA doesn't allow this. I was told to start a LLC in Nevada, any advice you have would be helpful