Are you tired of the low returns in your IRA or 401k coming from traditional investments like stocks, bonds and mutual funds, but are unsure how buy real estate with a retirement account? If your IRA or 401k is managed by a large bank or brokerage firm, you have probably been steered toward a limited array of investments, including stocks, bonds, mutual funds and money market accounts, realistically offering returns of around 5% once they are adjusted for inflation.
The reality is that real estate offers a much better return on investment (ROI), provided you buy in a great location that has steady property appreciation and ongoing rental income from vacationers or tenants. When purchased correctly, real estate offers diversification for your investment portfolio, is a time-tested hedge against the disastrous effects of inflation, is secure and offers ongoing income.
While you might not have the cash to do this sitting in your savings account, it is possible to roll money from a traditional IRA – and often a 401k or even some other retirement plans – into a Self-Directed IRA, where you can purchase real estate for investment purposes – here’s a quick rundown of how it’s done.
Self-Directed IRA Real Estate Rules
Investors can own real estate in both a traditional IRA and a Roth IRA and the assets will grow tax-free over time in both of these account types. In a Roth IRA, however, once a set of requirements are satisfied the earnings can be distributed tax-free.
A Self-Directed IRA can purchase and own residential real estate, including single and multi-family properties, condos and vacation home rentals. You can also buy commercial real estate, like retail shops, office buildings and gas stations in a Self-Directed IRA, as well as vacant land.
Prohibited transactions include any property that is used expressly for the personal benefit of the account holder, or any disqualified person. This includes the account holder, their parents, grandparents, spouse, children, grandchildren and their spouses, which are known as “lineal ascendants and descendants,” in IRS speak. In short, you cannot live in a house owned by your IRA or your spouse’s IRA, and you are not permitted to rent commercial real estate to a parent or child, etc.
More Real Estate IRA Rules
The IRS has set a number of rules to govern all IRA investments, and many of the rules that apply to buying real estate with an IRA are connected to the types of transactions that are not permitted and specific people who account holders are not permitted to do business with. It’s important for buyers to closely follow real estate IRA rules, or the property could be seized and the assets distributed immediately, which would be bad for a number of reasons, not to mention the taxes and penalties that would result.
In addition, if you happen to own a business, it cannot benefit in any way from your Self-Directed IRA real estate investment. In practical terms, this means that if you buy a vacation home rental and happen to own a pool-cleaning company, you are not permitted to hire yourself to clean your pool. Other prohibited transactions include any real estate investment where the account holder also acts as the property manager. The account holder is also not permitted to do any repairs or maintenance work to the property. All maintenance and property management fees must be paid from the IRA to a third party and all rents must be paid directly into the IRA account. Similarly, all property taxes, insurance and mortgage payments (if applicable) must be paid by the IRA.
What are your biggest questions or concerns about buying real estate with an IRA account?
Would you like to know more about how to invest in real estate using an IRA account? Click the link below and discover why buying real estate with an IRA in an ideal location can diversify your portfolio and provide a hassle-free revenue stream to dramatically improve your ROI!