Using Roth IRA to buy property ?

Question

Can you use your Roth IRA to buy your first rental property? I was curious, I been putting a lot of money into my Roth but also saving extra funds on the side for strictly Real Estate . Please comment below some strategies with using Roth IRA to buy property

Rob K. · Answer

As someone who bought a property in my Roth IRA back in 2011, here are some of my cost/benefit observations:

1) You need to run the numbers on taxes for both inside and outside the IRA before purchasing. You can't get the benefit of depreciation for a property inside the IRA. If you are not cash flowing positive significantly, then the benefit of tax free net income inside the IRA is not going to be realized.

2) While it is possible to get financing on a property inside an IRA, you are generally looking at larger down payments and higher interest rates then you would get with FHA or other conventional financing. Special rules apply to financing an IRA property such as potentially paying what is called UBT tax and a requirement that the financing be non-recourse.

3) There are custodial costs and fees associated with setting up and maintaining a self-directed IRA account and/or adding checkbook control which need to be factored into your analysis.

4) Properties that have potential to appreciate substantially are better suited for a Roth IRA then those that don't have the potential as the gain is tax free if and when you sell or distribute.

5) The tax free nature of a Roth IRA is far better for real estate then the tax deferred nature of a traditional IRA as eventually, any income and gain in a traditional IRA comes out under ordinary tax rates without the benefit of depreciating the property. For this reason, I don't believe real estate is well suited for a traditional IRA. I would only consider it for a Roth IRA.

Rebecca Wisner · Answer

all good info but you can not use an FHA loan to buy a rental property they only allow owner occupied so you would have to occupy. If you want to buy a rental that will not be owner occupied then conventional financing can be used. Typically if you are using your self directed retirement accounts lenders will loan 50% and 50% needs to come from the IRA or 401K. Conventional you can do with 15% down. Hope that helps

Dmitriy Fomichenko · Answer

@Ondrej Brown

You can use Roth IRA to buy a rental property. In order to do so you need to set up self-directed Roth IRA, rollover your existing Roth into it then new SD Roth IRA will buy the rental. It would not be "your" property though, the IRA would own it and all benefits would belong to the IRA. You are considered "disqualified person" to your IRA and although you control the IRA and investments of the IRA - you are prohibited from receiving any benefits from your IRA investments or provide any services to the IRA (for example: you can personally do any work on IRA-owned property).

The bottom line is this: if you can generate better returns in your IRA by investing in real estate than you are currently getting in the stock market - this can be great tool to help you build wealth tax-free.

Nick Barlow · Answer

@Ondrej Brown take out your contributions, which can be done tax free/no penalties in a Roth IRA, and use that money for the down payment. Let the earnings ride so there are no tax consequences.

You can use the Roth IRA to purchase, in a self directed IRA (SDIRA), but investing in a tax deferred investment (RE) with tax deferred funds (IRA) defeats the purpose of the tax deferred advantages.

Good luck!

Dmitriy Fomichenko · Answer

@Ondrej Brown

Think of your IRA as if you are managing/investing someone else's money (your future you). You can certainly use your personal savings and buy a rental using FHA loan. Using your retirement funds would be something completely separate. You can't commingle the two. Also, if you wish to finance purchase or real estate in an IRA - you can, but you must use non-recourse financing (because as disqualified person you are not allowed to provide personal guarantee for the loan to your IRA). Here is a list of lenders specializing in this space:https://www.biggerpockets.com/member-blogs/2810/50272-list-of-non-recourse-lenders-for-self-directged-ira-and-401kUsing leverage in an IRA will produce UDFI, which would be subject to UBIT tax. Self-directed Solo 401k on the other hand is exempt from UBIT on UDFI.

Eric Lau · Answer

or you can take back out your contributions without penalties. and again it has to be self direct Roth Ira

Rick Womble · Answer

There are several options to consider depending on how long the Roth IRA has been opened and your age, are you 59 1/2 yrs old?

One is to buy the house inside a self directed Roth IRA with all cash nor with a non recourse loan, which typically require a 30-40% downpayment.

The other option is to request a distribution from the Roth IRA and use conventional financing.

Distributions for purposes such as buying a first home or certain medical expenses can qualify for no-penalty withdrawals, but only if the Roth IRA has been open for five years or more.

Ondrej Brown · Answer

@Dmitriy Fomichenko WOW thanks you for the information . That’s crazy that the IRA would own the property tho. I know I’ll be getting my first rental property in a few a months. My plan was to get a FHA loan first to get things going.  Should I go that route first ? Then starting using my Roth IRA capital in the future . Once again thank you for the information !

Using Roth IRA to buy property ?

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