Using Your IRA (or 401k) to Buy Investment Property

Investing in Real Estate with a Self-Directed IRA

Every day, more individuals discover how self-directed IRAs give them control over their retirement funds and investing decisions. These plans remove the middle-man (think investment broker) from the process and allow plan owners to make acquisitions based on things they personally understand.

This also means you’re no longer tied to the average mutual fund, stock or bond. You gain access to an asset class called alternative investments. Alternatives include many things, such as private equity, forex, futures trading, precious metals, and more. But, the most popular holdings are real estate-related and include residential and commercial property, renovation projects, rentals, and tax liens and deeds. You can even invest in private mortgages to earn tax-sheltered retirement income when you use a self-directed IRA.

3 Popular Real Estate Holdings in IRAs

Rental Property: This includes residential or commercial property and even land. Whether you choose a house, an apartment complex, or commercial office space—your IRA can reap the potential benefits of monthly rent payments. Land can be leased out for farming, oil and mineral rights, timber, and other options. All rents are paid directly to your IRA. The deposits are tax-free and accrue over time to build extra investing capital for future endeavors.

Rehab-and-Flips: Ever popular and often satisfying projects, these acquisitions have the potential to garner tidy sums that can substantially impact the returns on investments in your retirement plan. Here again, all proceeds from a successful sale of your rehabbed property are paid to your IRA. If you have a knack for choosing a viable property that has great resale potential, this might turn out to be a profitable venture to reach your goals.

Private Mortgages: This is an option where your IRA extends loans to borrowers seeking to finance a home (or even an investment property of their own). Your plan earns tax-sheltered income on the loan terms and interest on the payments. Typically, the property is held as collateral. Even though you personally vet each borrower, you may encounter one who defaults on the loan. If that happens, your IRA takes possession of the property and sells it to recoup the loan balance. If a profit is made on that sale, that income is deposited tax-free into your IRA.

Rules to Know to Protect the Tax-Sheltered Status of Your IRA

Of course, the IRS has rules in place that govern investments in retirement plans. But, these aren’t hard to follow when your ultimate goal is to build wealth so you can comfortably retire. You must avoid prohibited transactions and dealings with disqualified persons at all costs to comply with these regulations. Not doing so can have dire consequences: penalties, taxation, and/or disqualification of your IRA.

Here’s what you need to know:

• Your IRA owns the investment, not you.
• All expenses incurred by the investment must be paid with IRA funds.
• Your account cannot transact with disqualified persons: you, your spouse, your lineal ascendants, and your lineal descendants and their spouses.
• For IRA-owned rentals or rehabs, you are unable to personally manage the property or perform work/maintenance yourself. You must hire an independent, third party to do so.
• Your IRA can’t buy a property you or a disqualified person already own, and you or disqualified persons can’t purchase real estate from your IRA.
• All disqualified persons are unable to take advantage of any aspect of the investment. For example, you can’t vacation in a rental your IRA owns.

Choosing real estate investments for your IRA can be exciting, but you must perform due diligence on any asset you consider. Consult with trusted professionals to help guide you through uncertainties and to ensure your transactions comply with the IRS. Once you become familiar with the best practices and the pros and cons, you can move forward to confidently invest in assets you believe can build a solid foundation for your retirement security.