How to Purchase Real Estate with a Self-Directed IRA

Many people are not aware that they can use IRA funds to invest in real estate, much like you would invest in stocks, bonds, and mutual funds. Since self-directed IRAs allow the investor to exercise some control over the process and how their money is used, it presents a great opportunity for long-term monetary growth.

While some investors may have shied away from putting too much money into the housing market over the last few years, improvement within the real estate industry has increased investor interest and helped remind people that real estate continues to be a solid long-term investment.

Still, if you’re thinking about using a self-directed IRA to jump into the real estate market, it’s important to remember that doing so requires planning and preparation. Self-directed IRA’s require account owners to make active investments on behalf of the plan, which means the owner must hire a custodian to hold the IRA assets and be responsible for administering the account, while also filing all required documents with the IRS.

With that being said, keep the following tips in mind:

PLAN AHEAD. It’s important to make advance arrangements to set up your self-directed IRA with an account custodian. That way, when you are ready to proceed with a purchase, the funds will be available within a few days. Since there are several IRA custodial firms to choose from, make a point to compare services and fees before settling upon who your designated custodian will be.

YOU STILL HAVE TO WAIT UNTIL RETIREMENT. Investing in real estate through your IRA is not a sneaky way to reap the benefits of your IRA before retirement. Long-story-short, you cannot use the fund to pay off your mortgage or to live in a property that you bought as an investment. The purpose is to anticipate an appreciation in property value, not to tap into the funds early.

AVOID A CONFLICT OF INTEREST. Your immediate family cannot be involved in the property and certainly cannot become tenants. Enabling a transaction that creates personal benefit on the other end is prohibited.

IT TAKES WORK. Before making the decision to use your self-directed IRA to purchase property, it’s important to have a solid understanding of the amount of work that goes into the process. In general, all expenses—from maintenance and taxes to insurance—are paid from the IRA, so proper reporting and administrative oversight are imperative. With that, it’s important to remember that the custodian must approve all transactions.

YOUR INVESTMENT GROWS TAX-DEFERRED OR TAX-FREE. Depending upon which type of IRA you’re using for your investment—a traditional IRA or ROTH IRA—your returns will go directly back into your IRA through the custodian and will grow either tax-deferred (with a traditional IRA) or more desirably, tax-free (when using your ROTH).

For example, if your IRA purchases a house for $100,000 and your IRA invests $10,000 to update it before selling it for $150,000, the $40,000 in profit (minus any expenses) is returned to your IRA as either tax-deferred earnings (in a traditional IRA) or tax-free earnings (with a ROTH IRA).

In closing, it’s extremely important to enter the process with an experienced tax strategist who can make sure that you’re following all IRS regulations and avoiding unnecessary penalties. In addition, it’s also wise to seek the services of a knowledgeable property lawyer, as well as the advice of a reputable Realtor who can help you select a property that will give you the best return on your investment.

If you’d like some advice or assistance with a potential property, please feel free to contact me.

Pam Evans | Hello Pam Evans Real Estate | www.HelloPamEvans.com | 678-778-6551