Can I use an Inherited IRA to invest in Real Estate

20 Replies

I have an tax deferred Inherited IRA with about 95k in it. I am looking to start my buy and hold business and am looking for ideas of how I can use my inherited IRA to invest in real estate without directly withdrawing the funds and paying taxes on it. I'm not sure if this is possible or if there are any creative ways to use it for real estate so any information would be helpful.

Hi Matt,

Lucky you!

I'm not a CPA or attorney however you should be able to convert that IRA to a Self-Directed IRA which would then allow you to invest the funds in real estate. If you search for "self-directed IRA" on BP you'll find tons of posts and articles about them. There are a lot of companies out there who do them, or claim to do them, but you need to do your research first.

If you don't already have a good CPA who knows a lot about RE investing I would recommend finding one.

Congratulations again and best of luck!


Hi Matt,

You can use an inherited IRA to make real estate investments. However, if you inherited the IRA from someone other than a spouse, you cannot treat the IRA as your own. That means you can't make contributions to the IRA, roll money into or out of the account (you can transfer custodians though), and you're required to begin receiving distributions from the IRA under the rules for distributions that apply to beneficiaries.


Thanks for the information!

@Eric Black I'll have to see if I am able to convert it into a self-directed IRA and check out the forums. I know the rules for inherited IRAs are different so I'm not sure.

@Gil Hartman It was inherited from my Uncle so I may just have to take the distributions. The required minimum distributions are pretty low per year since I'm 25 so if I want to use it to invest in real estate I may have to withdraw and pay the taxes. I was hoping there may be another way around it.

It's easy to miss the potential for profit by focusing on minimizing taxes- so watch out for that! That said, at your age getting that money out of the current IRA and into a Roth IRA might be worth looking into. Paying the taxes at the "front end" when you're young makes a lot of sense- any money you make in the future off that IRA will be tax free, and you could build up quite a bit between now and when you retire.

I'm pretty sure you can't just convert a beneficiary IRA to Roth, you'd have to take distributions and use them to fund a Roth. disclaimer- I am not a tax or financial advisor and I encourage you to check with one of those! But I did inherit a beneficiary IRA recently and did a lot of research on the topic. It can be pretty confusing.

One of the things that I decided for myself was that owning physical property in an IRA was kind of awkward and that I would prefer to use those funds for private lending. Your mileage, of course, may vary.

I know you can definitely convert to a self-directed IRA, we see it a couple of times a week on my team. It is just a matter of making sure it's worth it to invest in real estate with it given the RMD requirements. If you want to discuss the process, feel free to message me on here and we can set up a time to talk.

Originally posted by @Matt Engle :

I have an tax deferred Inherited IRA with about 95k in it. I am looking to start my buy and hold business and am looking for ideas of how I can use my inherited IRA to invest in real estate without directly withdrawing the funds and paying taxes on it. I'm not sure if this is possible or if there are any creative ways to use it for real estate so any information would be helpful.

 Matt - did you ever get this figured out?  I'm in the same situation and exploring my options.  I've been taking the MRD's, paying taxes and using what's left to invest in property.

If you were to convert to SDIRA or an SDROTh, and are looking for passive income, you could invest in notes.  It's not the same as actual property, but you'd probably find attractive rates of return.  There are several players on BP.  Try searching for and reaching out to folks like David Van Horn, Darren Eady and Scott Scharl who work in this area.

Cash out. You are trying to do a tax deferred investment in a tax deferred account. Also, when you withdraw it is taxed as ordinary income. I would take the tax hit now and save myself a huge tax hit in the future.

Also, investing in a retirement account adds a layer of complexity. You can do it but it is more challenging, you have to make sure you follow all the rules, and you are limited in how you can contribute.

Hey folks,

Not to step on any toes here but the advice given out by some above is incorrect. I am a registered, series 65 investment adviser here in SoCal. My firm specializes in this type of transaction. We are approved with a Trust to help investors establish these types of IRA accounts. Our firm has a $250K minimum. Call us with any questions please.

It was my understanding if you inherited a roth, you do not need to wait until 59.5 to disperse funds tax free. So lets say you get it and theres only a 1000 in it but you add to it, you can disperse those funds whenever you want

With regards to what Brandt said (about using a tax deferred account for a tax deferred investment -- real estate) .... I agree, but I think it can be very tax efficient if you're flipping. I have an inherited IRA as of about a month ago, and I just saw a cheap foreclosure I think I can make a fast $60,000 on. I hate doing short term flips due to taxes (ordinary income rates), but I'd LOVE to do this in my IRA. Two things are making me hesitate: 1) I don't know how to do it (ha!); and 2) time constraints, because I have two renovations underway already AND I'm the executor on this complicated estate.

But I welcome any assistance with figuring out how to flip in that IRA in the years ahead. I'd LOVE that!

@Karen F.

While you can flip in an IRA, there is a tax consequence of doing so. Income to an IRA is fully tax-sheltered from passive sources such as dividends, royalties, interest and rent from real property. When a tax-exempt entity like an IRA engages in a trade or business on a regular or repeated basis, and is therefore competing with tax-paying businesses, a tax known as UBIT applies to level the playing field for those tax-paying businesses. Flipping houses is considered a trade or business activity.

The tax is a trust tax paid by the IRA can can get to be as high as 39.6%.

That said, flipping houses in an IRA can still potentially generate higher net after-tax returns than many other investments, so a good opportunity should not be disregarded just because taxes come into the picture. Look at what the net return will be and determine if that is better than other IRA investments you could make.

An alternative is to use the IRA as the bank, and lend money to someone to flip a house at something like 2-3 points and 12-15% interest (common). That passive interest earning would not be subject to UBIT.

Hello a and welcome to BP! The information you did not mention was to roll over to a Roth Self Directed account. If you are young enough that might be the way to go if want to deal with it. If you use a Roth IRA that is self directed you can invest in real estate does not have to pay any taxes on the positive cash flow of profit made. Eventhough you cannot benefit in any way it might be the best way to go, especially if you are fairly young. Since you have to have a non-recourse loan on your property and those people usually require more of a deposit but people like Entrust have a list of non-recourse lenders that will be given to you if you need that. The answer to the question is yes, you can borrow or use that for real estate (a self-directed IRA or Roth IRA). Ask an administer or a salesperson answer all of your questions.

Good luck to you!

I have a self-directed IRA and I hate it. Legally, you cannot do anything to the property. For example: If you need the grass cut or a door knob replaced on your IRA property, you are supposed to hire someone to do it, send the invoice to the custodian for payment, which they charge a fee each time. I suggest cashing it out completely and paying the taxes. This gets the IRS out of your life and you can use what is left as you see fit without restrictions. It was free money to you anyway.

@Karen F. You mentioned that the account you are talking about is an "inherited IRA" so the option to convert it to a Roth IRA is not available to you.

However, you can still use the IRA to invest as discussed above. If your IRA does Flips often, the IRA may incur unrelated business income tax (UBIT), but in general the sale of property for gain is exempt from UBIT unless the property is inventory or property held for sale in the ordinary course of business. If your personal business is not flipping houses, the argument about whether property purchased and flipped by your IRA probably wouldn't come up with IRS unless you do it repeatedly. IRS is just now beginning to take a look at self-directed retirement accounts and tax compliance. So far as I know, it hasn't issued much guidance in the UBIT area relating to flips for self-directed IRAs, and doesn't have any systems to gather information about it independent of the IRA filing the required return, or auditing your personal returns. That said @Brian Eastman 's point on the taxation of IRAs is important to consider. If you really want to know more about this area, I'd suggest you read the December 2016 GAO report on self-directed IRAs and guidance for self-directed IRA owners at this link:

On the convenience side of things, you have two options. 

One is to hold the property in the IRA with the custodian writing all the checks, and the other is to have a single member LLC owned by your IRA. As mentioned by @Anthony Dooley , having the property owned by your custodial IRA does require the custodian to write checks every time you want to pay someone, and that can get irritatingly expensive and cause delays and errors, depending on the way your custodia charges. Also, you have to have your tenants, if any, write their checks to the custodian/IRA.

The single member LLC owned by an IRA is a second option. The single member LLC is convenient because you can be the manager, write checks and pay bills for the property the LLC owns. Some custodians do not allow you to be the manager of such an LLC (which makes it unfeasible because you have to pay the independent manager), but others do. Although a single member LLC owned by your IRA may be quite a bit more convenient, operating through a single member LLC may be a little more expensive than having the IRA hold the property, because there is the cost of setting up the LLC, and there are usually annual state registration requirements, the amount of which depends on the state requirements where the LLC is registered (which should be where the real estate is located).

In any event, Anthony Dooley's  cautions about what you can and can't do are absolutely correct. In general, you can hire others to service the property, write checks, keep track of the money and make decisions about what is to be done, but you can't provide any of those services yourself. 

If you are planning to be involved in a flip with your IRA, you should take all of these expenses into account before making the investment decision so you have an accurate idea of the actual returns your IRA will experience.

Just to make it clear, since I'm an attorney, this post is not a tax opinion and can't be relied upon to avoid taxes and tax penalties. I just thought you could use the information.

@Matt Engle , you can use an inherited IRA to buy real estate. And I would disagree with the person who suggested you take the tax hit all at once. There is a company called Lasaii who will structure your inherited IRA to purchase real estate so that you have the flexibility to use it as you want - no prohibited transactions and offset tax liabilities! Ask @Gabe C. .  He recently did a transaction with Lasaii.

Thanks everyone for the input. I don't consider myself a "flipper" ... I buy big, OLD houses with MAJOR reno needs, and hold them for at least a year, most frequently investing well over $100,000 in the renovation. A "slow flip" is what I call it, and sometimes I hold these SF homes as a rental after a full reno to get a little depreciation and income, too. I may just decide to continue to be satisfied with my 15% capital gains tax, partially sheltered by depreciation on my long-term buy & hold rental portfolio, and use the stock market holdings in my inherited IRA as some diversification, since I'm almost entirely out of the market these last 10 years, and totally concentrated on real estate investing. At least until we see if the tax code changes substantially under the new administration.

Wishing everyone a successful, healthy, happy 2017! Many thanks for the generous sharing of knowledge!

 @Claire Fenton is correct, @Matt Engle . I had a similar amount of money sitting in an IRA that I wanted to use for REI. I originally set up a checkbook SDIRA, which was convenient, but like some have said, had many restrictions regarding what you can do with the property. Then I stumbled on the Lasaii setup shortly after that. It's not really a one size fits all solution. Its effectiveness can depend on the amount of money you have and your age. The solution I went with basically transferred the cash to an annuity with Jackson. I take distributions from the annuity and apply it to a mortgage of my choosing. Since it's a distribution, I can spend it on any property without restriction (even my primary), but it has to be used on a mortgage. You can switch which mortgage you pay down at any time as well. You can choose to take however much you want as payment (within reason), and can modify the payments over time, but the end result is that you have to stretch it out until you're 59 1/2. So you can take a lot now and then tone it back to small payments, or you can just have it evenly distributed for the life of it.

Obviously if you don't have much in the IRA or are very young, this is pointless. I happen to be over 40 and had just enough to make sense. If you take more than an even distribution, you pay taxes on the withdrawals, but you can return at any time to non-taxed distributions. It just locks in at that point. So if you want to take a small tax hit for short term gains, like paying down a mortgage faster, you can do that without taking a hit on the entire amount.

It might be worth giving Alberto at Lasaii a call. He might have some other maneuvers that fit your situation better than mine. I'm going to shave a ton of years off of one of my mortgages with this technique, which will free up cash sooner or give me more equity to play with (HELOCs, cash out sale, etc). It also counts as reliable income with banks, to give you more borrowing power. I have another 401k with my current job that I can't touch, but plan to do the same thing with that whenever I end up parting ways. 

I also forgot to mention that the money in the annuity can be invested in a few ways as well. I mostly have it in an S&P500 Index Fund. So the pot can still be invested in the market and grow as if it were in an IRA. There are also investments with protections in place so that when the market is up, you gain, but when the market is down you don't lose. You just don't gain.