Q&A: Partnering Your IRA with Real Estate

IRA with real estate - square

Why real estate? What are the benefits?

For one, you’re diversifying your retirement portfolio, and getting it out of the stock market where it’s tied to the ups and downs of the same market that we saw lose $2 trillion in 2008. Your IRA is also more secure since it’s backed by tangible real estate, where the returns can provide a stable source of income that goes directly back to your real estate IRA, where it will wait for you come retirement.

If I invest in a home with my real estate IRA, can I live in it?

Unfortunately, no. IRS rules prohibit certain people related to the IRA owner, including the IRA owner, from living on the premises. The rules are there to prevent what’s known as “self-dealing”, to minimize conflicts of interests, that could adversely affect your IRA.

Disqualified persons?

A disqualified person would be:

  • The real estate IRA owner
  • The real estate IRA owner’s spouse
  • Ancestors
  • Lineal descendants
  • Spouses of lineal descendants
  • Investment advisors
  • Fiduciaries
  • Any business entity (LLC, Corporation, Partnership, Trust) in which any of the disqualified persons previously mentioned has a 50% or greater interest

What are prohibited transactions?

Prohibited transactions include the following:

  • The selling or leasing of any property between a plan and a disqualified person
  • Lending money or another extension of credit between a plan and a disqualified person
  • Furnishing goods, services, or facilities between a plan and a disqualified person
  • Transferring or using by or for the benefit of, a disqualified person the income or assets of a plan
  • Dealing with income or assets of a plan by a disqualified person who is a fiduciary acting in their own interest or for their own account

Do I need an LLC to purchase the real estate?

No, you don’t need an LLC to purchase the real estate, so long as it’s possible for you to purchase the real estate directly through your self-directed IRA custodian. When done this way, all rent checks and expenses will be paid to and through the custodian. However, if you would like checkbook control over your IRA, meaning you will be the one to collect the rent and pay all the expenses, then you need to set up an IRA LLC.

What’s checkbook control?

Checkbook control is just as it sounds, it’s a checkbook that you control. It means that you have signing power over your IRA so that you no longer need to go through your custodian to get funds moved around. So if you need to call a plumber to get something fixed on your property, you can pay them then and there, and the cost will be debited from your IRA. It’s essentially cutting out the middleman, making your IRA more efficient.