Are stock market woes preventing you from
building wealth in your retirement account? If so,
you might be interested in a small, but growing, trend
among individual retirement account owners-investing
their retirement funds in real estate.
A little-known IRS provision lets you extend your real estate
purchasing with tax-deferred dollars. Section 408 of the
Internal Revenue Code permits individuals to purchase
land, commercial property, condominiums, residential
property, trust deeds, or real estate contracts with funds
held in many common forms of IRAs.
HOW IT WORKS
If you like the option of using tax-deferred funds to
purchase property, you'll need to find an independent IRA
custodian that allows real estate investments, and work
with that company to set up an IRA account. The IRA account holder can't serve as the custodian of his or her own account. However, it's important to select a custodian knowledgeable about the types of investment you're interested in, because the custodian holds title to the real estate.
Fees, and the flexibility of the services provided, can vary
widely among custodians. If the custodian holds real estate
on your behalf, but does not service it (collect the rent,
etc.), you may have to contract with other providers.
However, be sure that all rents are paid into the IRA and
that all taxes are paid by the IRA.
PURCHASING THE PROPERTY
IRA custodians that hold real estate will usually allow you
to purchase vacant land, residential properties, or commercial
buildings for your portfolio. In addition, some custodians
may permit foreign property or leveraged property.
Since buying a property may require more funds than
you have available in your IRA, you also can have your
IRA purchase an interest in the property in conjunction
with other investors such as a spouse, business associate
or friend.
Because all property expenses, including taxes, insurance,
and repairs, must be paid from funds in your IRA,
you'll need liquid funds available
in your account. Naturally, all
income generated from the property
will be deposited in your IRA
account so you can use that
money to cover your costs. You
also can make annual contributions
within federal guidelines. It's
also possible to sell properties
while they are held by your IRA, as
long as the purchaser is not a
family member. Once a deal closes, your IRA account will
hold the cash proceeds-ready for you to make your next
investment.
A Few Limitations Operating Your IRA-held Property
You may not use the real estate
owned by your IRA as your residence
or vacation home.
Your business may not lease space
in your IRA-held property.
You must not have any personal use
or benefit of the property.
You may not place a property that you
already own into your IRA.
Your spouse, parents or children must
not have owned the property before it
was purchased by your IRA.
You can withdraw real estate from your IRA and use it as
a residence or second home when you reach retirement
age. At that time, you can elect either to have the IRA sell
the property or take an in-kind distribution of the property.
Under that arrangement, your IRA custodian assigns
the title to the property to you. You will then have to pay
income taxes on the current value of the property if it's
been held in a traditional IRA. Whether your retirement
strategy is to hold properties or buy and sell for gain, real
estate investing through your IRA can yield extraordinary
returns toward your future retirement.
While any form of IRA allows for real estate
investment, there are other considerations when
choosing the account type that's best for you:
A traditional IRA lets you deduct annual contributions
from your income. However, once you
begin withdrawing money, those funds will be
taxed as regular income.
A Roth IRA gives you no deduction on your
current contributions, but does allow you to
withdraw funds tax-free. If you expect to buy a
real estate investment in an IRA and hold it for a
long period, this is probably your best option,
especially if the property increases in value over
that period. A SEP-IRA is designed for self-employed individuals and small companies. Keep in mind that if you have employees,
you must make contributions for them as well. This option is a great alternative for real estate practitioners who can make the higher contributions because they can build up funds more rapidly to purchase properties.
Months that begin on a Sunday will always have a "Friday the 13th".
Mrs. Tina Devore
REALTY EXECUTIVES Lafayette
3554 Promenade Parkway, Suite A
Lafayette, IN 47909
Office: 765-807-2607
Cell: 765-418-0919
tinadevore@realtyexecutives.com
www.tinadevorerealty.com
Equal Housing Opportunity If you have a brokerage relationship with another agency, this is not intended as a solicitation. All information deemed reliable but not guaranteed.
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