How to Use Your IRA for Real Estate Investing

Individual retirement accounts, or IRAs, are smart tools to hold usual financial assets such as bonds, stocks, ETFs, or mutual funds. However, an IRA can also hold real estate and other non-traditional retirement assets if you know how to do it.

There are two options to invest in Real Estate with IRA:

• Using a Self-Directed IRA (SDIRA)
  Borrowing against your traditional and Roth IRA

1. Using a Self Directed IRA to Buy Real Estate

Most trustees offer traditional IRA investments and do not allow an IRA owner to invest in real estate because of the additional administrative burden of managing real estate. Therefore, if you want to invest your IRA funds in real estate, you will first have to convert your traditional IRA to a self-directed IRA.

Generally, you can establish a self-directed IRA with a trust company or non-depository bank. Although many companies allow you to set up an SDIRA on your own, it is recommended to have a custodian to guide you through the IRS rules. You may have to set up a limited liability company (LLC) to hold your assets in it.

Can you use that property, and who are the “disqualified” persons as per the IRS?

The property you buy with your SDIRA must be purely an investment. You or your family cannot use it as a second home, vacation home, or a place for your child to stay. These rules also apply to the people the IRS deems as disqualified, and they include:

• Your spouse
• Your children and their spouses, grandchildren, and great-grandchildren
• Your parents, grandparents, and great grandparents
• Any entity that owns 50% or more of the property
• The trustee or custodian providing services to the plan

Also, you cannot buy the real estate from any of the disqualified persons mentioned above, nor can your IRA buy a property that you already own. This is called self-dealing, and the IRS prohibits this transaction.

2. Borrowing Against Your Tradition and Roth IRA

In reality, you cannot borrow against your IRA or directly take a loan from it. However, you can use the 60-day rollover rule to take money from your IRA, return it, or put it into another qualified tax-advantaged account within 60 days without attracting any penalties or taxes.

When should you borrow against your IRA?

If you have a financial emergency or a time-bound investment opportunity, you can use the 60-day rollover rule to borrow against your IRA.

For instance, when you have no other source of funds for medical expenses but are expecting an income influx soon through a tax refund or other sources. Then, you can borrow from your IRA to pay for the medical expenses and return the borrowed money within 60 days when you receive the expected income.

Conclusion

While real estate investing is relatively safe, it is not completely risk-free. The property value may not appreciate as expected due to market fluctuations. To minimize risk, consider diversifying your portfolio by investing in different types of asset classes.