Not able to hold real estate as an investment within an IRA?

31 Replies

My financial advisor had this to say in regards to the question of whether or not I could (without penalty) use funds in a self-directed roth IRA as a down payment on an investment property. I have no reason to doubt it's truthfulness but it seems to go against what I've always heard:

"Your Roth IRA's are already classified as self-directed IRA's. You are not able to hold real estate as an investment within an IRA. So unfortunately, the only way to use these assets to purchase real estate would be to pull the money out of the IRA incurring the 10% penalty plus paying the taxes on the growth in the account. I hope this helps but I'm guessing it isn't the answer you were looking for."

Looking for feedback on that from anyone who might confirm or know otherwise...

I presume your financial advisor makes commission off of selling you investments?   Sounds like he was trained by Wall Street.  

Several people have invested with me through their SD IRA. I could debate whether or not SD IRAs optimize returns, but it is possible.

@Kurt Bouma

Your financial advisor is flat out wrong.  Either he does not know the IRS rules, or he does and is playing a common Wall Street game of hoping that you don't and will trust his misdirection.  We've seen plenty of both over the years.

An IRA can invest in anything the IRS rules allow for, which excludes life insurance and collectibles. In addition to conventional financial products, that means that real estate, private note transactions, stock of privately held entities, precious metals, cryptocurrencies and a whole lot of other alternatives are available.

A specialty IRA referred to as self-directed is required for alternative asset investing. The basics of the IRA are the same with respect to contribution limits, timelines, etc. What is different is the processing model and the capacity of the IRA custodian to document off-exchange transactions that are more one-off in nature.

As this is still a tax-sheltered IRA, there are rules you will want to educate yourself about with respect to keeping things at arm's length and exclusively for the benefit of the IRA. You cannot benefit personally at the current time, nor can you mix personal and IRA capital. The endeavor is all about diversification for the IRA.

An IRA may use debt-financing such as a mortgage to acquire property. The mortgage must be non-recourse, meaning no personal guarantee from you.

There is a ton of information on this topic here on BP, as well as several professionals who are actively engaged and sharing their expertise.  Do a little reading and then get on the phone with a few providers.

There is a lot to learn, including a variety of plan service types (custodian vs checkbook for example).  Take some time and figure out what will work best for your goals.

Originally posted by @Greg Scott :

 " I could debate whether or not SD IRAs optimize returns, but it is possible. "

Thanks for the reply, Greg. Could you expand on the quote above? Not sure what you mean. 

To answer your question, yes, he makes his money by me keeping my money with him. If it goes into real esate instead of securities he loses. So, I am taking what he has with a grain of salt. He just doesn't come across as someone that would lie though so I wonder if I'm missing something. I feel like I've read articles and heard podcasts about people that invest in RE through a SD IRA all the time.


@Kurt Bouma Another thing he failed to mention was that you can take out the basis in your Roth at any time without any taxes or penalties. So, if you're looking for seed money for a down payment and don't want to go through all of the complications of managing real estate inside a self-directed IRA you may be able to get that amount as a withdrawal from your Roth without any taxes or penalties.

I should mention that the Basis is defined as the amount you contributed minus any withdrawals. If you converted money from a Traditional IRA to a Roth IRA it is counted as Basis after 5 years and can then be withdrawn without taxes or penalties.

So, apparently he was just saying that as long as the money is in the IRA with him (Edward Jones) they don't allow for real estate holdings inside of an IRA. I've been meaning to close my accounts through EJ and roll them into a fully self directed account elsewhere anyways. Do any of you have input with regard to that process?

@Kurt Bouma years ago I moved my money from Charles Schwab to Equity Trust. It took over a month maybe two as I remember and they charged me a fee for taking out the money. That seemed pretty crooked to me.

Ask your current and new custodian about how to do the process. If you handle it wrong you can lose the IRA status.

@Ned Carey I had the same experience with equity trust but I would not write them off for it. Using an IRA is a great way to accumulate tax free or deferred gains in a real estate portfolio. Nobody likes fees, but in the big picture it isn't much.

Simple answer, 100% yes you can purchase a home within a self direct IRA.

Originally posted by @Kurt Bouma :

So, apparently he was just saying that as long as the money is in the IRA with him (Edward Jones) they don't allow for real estate holdings inside of an IRA. I've been meaning to close my accounts through EJ and roll them into a fully self directed account elsewhere anyways. Do any of you have input with regard to that process?

The short way: Find a Self Directed IRA company, open an account, send them the money, and get investing!

The long way: Learn about Self Directed IRA rules, Checkbook Control IRAs, and Self Directed 401(k)s. Then make an educated decision on which strategy is the right fit for you. They each have advantages and disadvantages. Then find the appropriate account provider, open an account, send the money, and start investing!

I would recommend the long way :)

Edward Jones, Vanguard, Charles Schwab, and the like handle a lot of the background nonsense for you (paperwork). When you get into this self directed world, you're giving yourself more paperwork to do. It's not horrifically onerous, but it is certainly more than your typical stock brokerage.

The real question (now that you know your advisor is a hack) is SHOULD you hold RE inside an IRA? I would lend from my IRA or maybe flip, but not hold.

I've read about too many regrets. 'If I'd only known how many rules there were and that I couldn't even take depreciation, I never would have held RE inside my IRA.' Do your research.

@Kurt Bouma

You IRA can hold a business (LLC) AND the LLC can hold real estate. Please consult a tax professional immediately because this question is really the ira status and what it does or doesn't so and how thst will effect you. Good luck!

@Kurt Bouma identify a new custodian for the funds (vanguard, fidelity, Schwab, etc), and tell them you are interested in moving your retirement account, they will have the appropriate paperwork. It is a pretty straightforward process as long as the current fund is not with your current employer.

@Kurt Bouma I think it's also possible to create a C-Corporation, then the IRA can purchase the stock of the C-Corporation. You should be able to take any normal business expenses associated with RE including section 179 and normal depreciation. Definitely talk to a CPA...they are not necessarily invested in where you put your money, only how to minimize your tax liability.

Thanks all for the replies. Sounds like I have homework to do. And, in the short term, probably easier to find a way to make the RE investment(s) using cash other than what's held in the IRA

@Shawn Melis the custodians you  mention do not do self directed IRAs. You can't hold real estate in their accounts.

Also a C corp is a terrible way to hold real estate. It also misses the point. Depreciation does you no good when your income is already tax deferred in the IRA.

@Kurt Bouma ditto what @Steve Vaughan (PS a good guy to follow here) Buy and hold real estate is already a tax advantaged investment. There is little advantage to holding it in an IRA. Due to IRA rules money you borrow to buy real estate held in an IRA gets an extra Tax (UDFT/UBIT) This tax essentially negates the advantage of the tax deferment on that income.

@Kurt Bouma holding a property In my Roth IRA initially valued at $150k until I sold it 12 years later for $415k without any depreciation recapture tax, no capital gains tax, NO TAX, seems smart. I'm not sure why people don't think this is appropriate for IRAs. In addition, I also had the Ira hold the mortgage upon the sale. Teal estate in an Ira -The gift that keeps on giving.

@Kurt Bouma don’t listen to what everyone else is saying your advisor is correct. I worked for many years in finance and specialized in retirement accounts so I know a thing or two. Retirement accounts can only hold securities, so stocks, bonds, even reits but you can not put your house in your portfolio. My series 7 teacher used to say, “you can hold your apple stock in your ira, but grandmas house and your beanie baby collection can not go into the account.” Think of it this way, when you start take RMDs from your account, you are selling off a position to receive funds so youre selling your ownership. If your house is in the account you can’t sell a portion of your house on the secondary market. If you completely liquidated your account, you sold the ownership of your possessions which is impossible with a house because the title/deed never transferred to anyone.

I hope that made sense I’m happy to explain differently if needed.

With that said though, obviously speak to an accountant for this, but you can use funds generally from a 401k (I know you said Ira and yes they are different) as a down payment on a house and people generally confuse that aspect as owning the house as a position in your account.

@Matt Mulvihill edit: read more of the comments and some are correct but it seems like some might be confusing using those funds to make a purchase vs holding it as a position and that’s a big difference.

Full disclosure I worked mostly for vanguard but also have experience with LPL and TIAA

@Matt Mulvihill

You might know a thing or two but it is obvious that you don't know specific rules when it comes to investment options with an IRA. Retirement accounts are NOT limited to holding securities only. One can own a real property in his or her IRA. Not your residence or your grandmas house, but an investment property. 

According to the IRS your IRA can be invested into virtually anything except life insurance and collectibles only:

@Matt Mulvihill

Irs Publication 590 uses “property” over 50 times considerably more than the few times “stocks bonds etc” is used. It’s only been that way for IRAs about 50 years pensions even longer. It’s ok because you are learning -a big reason why BP is so successful. Congrats! 

@Carl Fischer I am learning about real estate, totally correct but I know about investments. And again totally correct the IRA publication you referenced mentions property 45 times and only mentions stock 15 times. But if you look at bottom of page 9 top of page 10, it clearly states property can't be contributed to the IRA but the funds can used to make the purchase which is what I said. as for holding it as a position, I was wrong I guess in theory if your IRA is large enough to purchase a property (which that word along has many meanings) you can sell what ya got to purchase it bearing in mind the strong limitations like the cash flow can't be another contribution because its passive income and IRA's as we know are funded with earned income or that this can't be personal property it has to be for an investment. As for the tax advantage, that would be the only thing I could think of that might have this make sense but then we'd have to start the conversation of liquidity and when you need to take RMD's.

@Dmitriy Fomichenko neither thing you sent me made sense. You just reinforced that you can't contribute beanie babies to an IRA and the second thing you sent me didn't mention owning a house in an IRA at all.

Im not here to start an argument, I apologize if something I said came across as wrong. At the end of the day all I can say is if you have no involvement with the property, it might be possible. As a fiduciary I would say speak to an accountant, they will know if the tax advantage makes sense but other than that it would not be my recommendation