Can I buy investment real estate with my ira funds?

Question

is there a way to take some of the $ out of my ira & use it to pay cash for an apartment building without causing a taxable event?

if so, can i stick the cashflow generated from the apartment building into my general living expenses account or would it have to be deposited back into my ira account?

note 1: i have a 7 figure ira & this purchase would only represent a 37% withdrawal from it.

note 2: i also own 21 other rental properties (with another house & another duplex in contract to buy & offers on two more that i want to buy, all with cash.)

note 3: i retired last december at 49 & am living very well off the cashflow generated by my rental properties.

note 4: my vanguard funds have been totally flat for the last year. havent made a penny on them, but my real estate holdings have exploded in value & the rents have all been raised, fantastic cashflow even after all expenses

Dmitriy Fomichenko · Answer

Dan, when you buy rental property in your own name you can take advantage of the depreciation deduction, which is a paper loss, to offset income from other sources. Since IRA is tax-deferred vehicle - you will not get the same benefit by buying rentals in your IRA.

On the other hand if you have personal savings and start doing private lending - the interest income you generate would be taxed at your top marginal tax rate.

Therefore, generally, it is better to buy rentals in your own name and invest in trust deeds with your retirement funds. Now, every situation and every investment is different so you need to evaluate your particular situation and make the decision that is best for you.

Doreen Chaisson · Answer

If you purchase a piece of property with your IRA funds, you cannot do any of the maintenance or repairs yourself.  You can''t buy a piece of property that your or any disqualified parties currently own, have ever owned, live in or plan to live in.  You must hire 3rd parties to perform maintenance & repairs.  They must be paid for their work out of the IRA.  Similarly, you cannot pay for any repairs personally and then expect to be reimbursed by your IRA.  Any expenses related to the IRA-owned property, including insurance and property taxes, must be paid with IRA funds.  Hence it's important to have either a good cash reserve in the IRA or to be sure the property is reliably income-producing.  All income produced by the IRA-owned property must flow back to the IRA, you cannot make any personal use of these funds, as it would be considered a taxable distribution from your IRA, also subject to early withdrawal penalties.

Dmitriy Fomichenko · Answer

@Tim B.

You can buy real estate in your retirement account, but in order to do so you need a 'self-directed' IRA or 401k. Once such account is established, you can rollover funds from your current IRA and new IRA would be the owner of the property. Since the property owned by the IRA, all income belongs to the IRA and all expenses must be paid from the IRA.

Since there are no tax benefits when you own RE in your IRA, you may want to consider other alternative investments such as private lending.

Justin Windham · Answer

@Gail Bray Unlike with a 401k, you cannot borrow from an IRA. The 60 day distribution window is not intended to be a loan policy.

Jay Hinrichs · Answer

I believe this would be very possible we see it every day.

you need to be with a custodian that allows self directed purchases.

I do believe you can't work on it etc..

there are some very good IRA set up companies here In Oregon.. that could assist you with this.

One thing when buying RE in your IRA though is to make sure you have Ample reserves if you have a big fix or bummer situation you can't take your personal funds and comingle with your IRA asset.. I believe that is true.

You could send me a PM if you would like a referral to someone here in Oregon that can get this done for you, top notch folks.

Account Closed · Answer

@Tim B.

About six years ago I rolled over my ROTH IRA into a self-directed account with some help from @Jay Hinrichs.  So glad I did.  I since rolled over my 401k and been loaning funds to partners on their flip projects.  My principal on these projects are covered between 200-300%, i.e. if project gets foreclosed my principal is covered up to 3x.  These projects are in the Portland OR metro area, yielding 15-19% a year, and the note is recorded via Trust Deed.  Before I was using custodian affiliate note investing outfit that did not work out that well for me and did not have returns that justified the risks IMHO.

Juan Deshon · Answer

You can purchase property with the use of a Self-Directed IRA. You would be required to move those funds to a self-directed custodian. However, if you plan on keeping it within the IRA to not cause a taxable event expenses and cash flow must be handled by the IRA. You personally would want to keep an "arms length" transaction to not cause a prohibited transaction and risk the entire 7 figure IRA from being distributed to you. I would consider consulting with your Tax advisor to determine what direction you should take.

Dan D. · Answer

Ok; yes I understand now.  Thank you.

Dan D. · Answer

I didnt understand the last statement.  Are there tax benefits to private lending out of an IRA that are not available when owning RE?  Can you clarify?

Gail Bray · Answer

you can borrow from your IRA without much penalties and less penalties if you pay it back to the IRA in 60 days.

Can I buy investment real estate with my ira funds?

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