Four Ways To Hold Real Estate In An IRA

Not only does real estate create portfolio diversification, but it is also a tangible asset that can be seen and touched.

It’s crucial to conduct your due diligence and work with a financial professional before pursuing these opportunities with your retirement dollars.

It’s crucial to conduct your due diligence and work with a financial professional… more

Real estate has a particular appeal for many retirement investors. It is considered a long-term investment, which tends to match the longer time horizons of retirement savers, and investors can use IRA dollars to fund real estate transactions.

All it takes is working with a custodian that allows you to self-direct your IRA funds into alternative assets, like real estate.

By investing in real estate with a traditional IRA, investors gain tax advantages. For instance, capital gains can be avoided in many cases and taxes on income from return on investment are deferred until it’s time to take distributions.

In the case of a Roth IRA, account holders can avoid paying taxes on distributions or profit generated by the sale of the property entirely.

Here are four common ways self-directed IRA investors invest in real estate:

Direct purchase…

The IRA buys the entire property outright using funds in the account. The income and expenses flow directly in and out of the IRA.

Partnerships or tenants-in-common purchase…

These transactions combine the investor’s IRA funds with other investors’ funds or in conjunction with the IRA owner’s non-IRA funds. The investment income and expenses are handled proportionate to each entity’s ownership amount.
Mortgage-backed purchase

In these purchases, the IRA borrows money to purchase property.

Important caveats to note are that neither the IRA nor the account owner can have any personal liability in the mortgage, which means that investors cannot back their own loans. A non-recourse loan must be used so that the lender can only seize the property being purchased and not the IRA owner’s or the rest of the IRA’s assets if the IRA defaults on the loan.

All mortgage payments are made with IRA funds. In addition, if property purchased in an IRA is financed by debt, income produced by that property, as well as the gain on any sale, could be subject to tax.

Limited liability corporation…

In these transactions the property title is held in the name of the limited liability corporation (LLC.) In this case, the IRA holds an interest in the LLC rather than title to the property.

Buying real estate in a self-directed IRA using an LLC provides IRA owners with the protection of an LLC while giving them a bit more flexibility in terms of investing. For example, the LLC can buy and sell properties without having to go through the self-directed IRA custodian each time.

Many retirement savers use IRA funds to purchase investment properties, allowing them to grow their nest eggs through rental income and capital appreciation. But investors should ensure they understand internal revenue service (IRS) rules before buying real estate with an IRA.

For instance, neither IRA owners nor their relatives can live in the property or work on the property (“sweat equity,”) and everything from lawn care to changing a light bulb must be paid for with IRA funds. Running afoul of these rules could trigger penalties or taxes.

Of course, all investments come with their risks, and real estate is no different. It’s crucial to conduct your due diligence and work with a financial professional whom you trust and who has experience with holding real estate in an IRA before pursuing these opportunities with your retirement dollars.