Using Your IRA To Purchase Real Estate

If you purchase real estate and place the property inside your IRA, you do not own it; your IRA owns the property. Since qualified plan law governs your IRA, the owner must adhere to Internal Revenue Service guidelines. Investment restrictions, custodial fees, distribution rules and, ultimately, income taxes must be paid. All proceeds must go back into the IRA and occupancy is not an option. In addition, if the real estate is a rental property, for compliance purposes, your custodian will appoint a property manager. If loans are used, the loan must be a nonrecourse loan (secured by the property but no recourse on any other assets). Commercial lenders usually do not engage in these types of loans, so the private sector (private investors, owner/seller financing, etc.) is your best option

The second way an IRA owner can use an IRA to purchase property is for the real estate to be purchased outside the IRA and owned outright. This approach is more traditional because the individual owns the real estate and therefore holds title. Since the individual owns the real estate, real estate law governs the owners investment. Real estate law is more consumer friendly, and the real estate can qualify for long-term capital gains income tax treatment and many other financial and economic benefits. Depreciation, additional write-offs, income flexibility and a stepped-up income tax basis are possible. The use of 1031 Tax Deferred Exchanges and/or the Personal Residence Exclusion are now possibilities.

An IRA can completely or partially fund a real estate purchase. In addition, you can purchase and own the property outright or share ownership with other IRA and non-IRA owners.

Many people have not heard that purchasing real estate via an IRA is a possibility and certainly are not aware that there are two possible ways to make this type of purchase. Both approaches have been around for many years, and real estate gives the investor options other than stocks, mutual funds, money markets and certificates of deposit.