Using Retirement Account to Invest in Real Estate

[Michael Hurdle]

Greetings. Does anyone have experience with using his/her retirement account to invest in Real Estate? If so, does the entire profit amount have to go into the retirement account or just the amount that is used from the account?

Thanks

[Brian Eastman]

@Michael Hurdle 

I'll start by noting that there is no simple answer to your question. Seeking the advice of a competent professional in the field will be the best route to a plan for your specific situation.

If a self directed IRA or 401k is used to purchase property, all income from that property must be returned to the plan. There can be no direct or indirect benefit between the plan and a disqualified party - meaning you cannot receive income from plan investments among other things (except of course by taking a distribution from the retirement plan, which may be taxable).

A self directed plan may utilize a mortgage to purchase property, in which case all income still returns to the plan. The mortgage must be non-recourse. This means no personal guarantee from you. The use of a mortgage under an IRA triggers a tax known as UDFI, which is paid by the IRA. Even though the IRA pays this tax on income derived from the use of non-IRA funds, you can still achieve a higher cash-on-cash return for your IRA dollars as a use of leverage.

A self directed IRA or 401k may also joint venture with another party, including the account owner in certain well structured arrangements. In such a joint venture, the income is proportionally divided between the JV partners in accordance with their capital contributions. This type of strategy requires great care to get it right.

In @Matthew Newcomer 's case, the retirement plan is not the investor.  He has simply borrowed money from his plan, which is treated as personal funds for the purpose of the investment.