Investing in Real Estate with Your Self-Directed IRA

Investing in real estateInvesting in real estate has become increasingly popular as an alternative to more traditional investing, like stocks and bonds, especially when it comes to those who are looking at real estate as an option to grow their retirement account.

While real estate is big for those interested in flipping homes, or renting out to tenants, only 2% of retirement account holders invest in real estate. And we at Accuplan think that’s a crying shame. To put it simply, think of it this way, say you currently have $100,000 in your IRA, if you buy a home with that IRA, fix it up, and resell it for $120,000, your IRA just gained $20,000. This is exactly why real estate investing is hot right now.

Some custodians offer IRA owners checkbook access to their IRA balances, and with it, investors can get significant flexibility in investing options, and greater control over their retirement assets.

Sounds pretty great, doesn’t it? Because it is. Investing in alternatives with your IRA can significantly grow your IRA, so let’s go over how it’s done.

How does it work?

First, in order to invest in real estate with your IRA, you have to find a financial services firm that will allow you to open a self-directed ira real estate. A self-directed IRA is essentially the same as a traditional IRA, but allows you to purchase a broader range of investments, including real estate (note: some IRA custodians don’t allow their customers to invest in real estate, so always make sure you’re fully looking into who you’re dealing with). Although you get to choose your own investments in a self-directed IRA, you cannot be the custodian of your own IRA, so you should find a firm that is familiar with handling real estate investments in IRAs.

Say you have now set up and account, and you have your assets sorted out, the next step would be to find what type of real estate you would like to invest in. What’s so great about a self-directed IRA is that you have freedom to choose, and your options, just in real estate are very, very broad. Options include:

  • Single-family and multi-unit homes
  • Apartment buildings
  • Condominiums
  • Commercial property
  • Improved or unimproved land (leveraged or unleveraged)

Once you’ve provided the documentation and proper instructions for purchasing the property, your IRA custodian will initiate the property purchase for your IRA. The title of the property will reflect the name of your IRA custodian. All property management and property specific expenses must be made through the IRA, so the IRA must have sufficient cash to pay these amounts. Having to rely on outside funds to manage expenses can lead to the loss of tax benefits or penalties.

What is and is not allowed?

What might play a role in how you decide what type of property is for you might lean left or right after learning what is and is not allowed. You can purchase property in your IRA as long as it does not result in what is called “self-dealing”. This means you cannot purchase a home or building in which you will reside or do in business in your IRA. Your IRA also cannot purchase any property owned by you or a business in which you or certain members of your family have a specified percentage of ownership. The IRA is also prohibited from selling any property to you or any of the aforementioned parties.

Neither you nor your immediate family can benefit from the investment before you reach the IRA’s distribution age. If you do, you could be hit with a tax penalty and could have your IRA invalidated.

Everything you use to fund an IRA investment property must come out of your IRA. Likewise, money that comes out of the investment property must be given back to your IRA. So if you buy an apartment and rent it out, that rent money must go back into your IRA—not your wallet. This is because your IRA is the owner of that property, and should directly benefit from the monetary gains.

If your investment property requires repairs like a new water heater, you need to use your IRA to pay for it, which is where a tool like checkbook control would most definitely come in handy.

Get a hold of Accuplan today if you have questions about opening up your own self-directed IRA, or if you’re interesting in using your existing IRA to invest in real estate.