With school starting around the country I think it is important to talk a little bit about the basic steps and rules relating to owning real estate in your IRA. I wrote this article a while ago and am eager to share it on the blog…

Day after day we receive phone calls from prospective clients all stating the obvious; “I am tired of having my retirement in the stock market.  I do not like the fluctuations in my account. I want to move my retirement funds into alternative ‘real’ assets. I want to use my IRA funds to purchase real estate. Will you help me set up a self-directed IRA?”

A lot of people think that owning real estate in a “Self-directed IRA” is a new phenomenon, but the truth is you have been allowed to hold real estate as an alternative investment in your IRA for over 25 years.  Most people have not heard this though because the big banks and brokerage houses have done an excellent job of teaching the public that an IRA is a retirement account that is used to own an asset that they sell such as mutual funds or CDs.

Buying real estate in your IRA is not something that you can just go out and begin doing on your own.  You must have a good understanding of the rules first. I received a call yesterday from a gentleman that wanted to by a vacation condo in southern California. He wanted to live there for part of the year and rent it out to beachgoers when he was not there. The problem with this scenario is that he would be benefiting from his IRA and thus would have disqualified the tax status of his IRA. When owning real estate it is important to remember that you or any other disqualified person cannot use the property for your benefit. If you ever do you would be required to pay the prohibited transaction penalties on your IRA along with any income taxes that may be due.

Various types of scenarios exist for permissible real estate investments in your IRA. You can own property such as houses, condos, commercial properties, and undeveloped and developed land. Using real estate as an alternative investment vehicle could benefit your retirement account just as any other asset could. If your IRA purchased a rental home and leased it to a good family your IRA would collect the rents every month, and when the property was sold your IRA would receive all of the proceeds from that sale!  A traditional way to look at this scenario would be if you owned stock in your IRA and monthly dividend was issued. When that stock appreciates and you decide to sell your IRA receives the proceeds from the sale.

If you have a small IRA and cannot pay cash for real estate do not fret. There are ways to overcome this problem. One way is to try to qualify for a “non-recourse” loan. These loans can be hard to qualify for, and generally have higher than market interest rates with low loan to value requirements. With this type of loan the IRA must pay the note payment and your IRA could be liable for the UDFI tax. It would be a good idea to consult with a tax advisor if you choose to go with this method. Another option would be to partner with others to purchase the real estate where each party would own an undivided interest in the property.

One rule that must be followed is that the IRA is required to pay any expenses for the property such as property taxes, HOA fees, utility bills, or maintenance costs. Likewise the IRA is the entity that collects any income that is generated from the property. This rule is very important to follow. If you don’t do this you could jeopardize that tax status of your IRA.

It is always best to maintain a ‘hands off approach’ to the real estate owned in your IRA. You can do this by hiring a property management company to maintain the property, do any needed repairs, pay the utilities and fees, find good tenants, and to collect the rents. Using a property management company is beneficial in that it helps you show that you have remained completely separate from this property and have received no benefit from it.

Anyone who does not have a self-directed IRA can transfer their retirement assets to a self-directed account. All you need is a self-directed IRA custodian or administrator to help you open your account. Once your account is open and funded, you can begin looking for your investment property.  The administrator of your account will assist with closing the transaction, and the property will be vested in the name of your IRA. Once you reach this point, your IRA has entered the realms of self-direction and if situated correctly, will reap the rewards!

Please Note:

As with most investments the real estate market experiences fluctuations. It is imperative that you consult with a competent investment adviser before deciding to make an investment in your self-directed IRA.

All information contained in this article is for informational purposes only. IRA Express does not offer investment products or provide accounting, tax, legal, or investment advice. Interested parties seeking investment products or advice should seek and consult with persons or entities licensed and qualified in those areas relating to those matters.