Investing in Real Estate IRA? Here are 7 Facts You Should Know



Buying real estate with IRA is one the best ways to create a steady source of income during retirement. It takes a minimum down payment and the earnings grow tax-free. With a self-directed IRA, you also have more options, more flexibility and more control over your investments. But before you buy real estate using your IRA, here are 7 rules you should know if you want to maximize your ROI.

1. You Can Secure a Loan to Invest in an Asset
Your self-directed IRA can be leveraged to secure a non-recourse loan which can then be used for purchasing a property you have in mind. However, if you do use financing, you are required to pay Unrelated Business Income Tax (UBIT) because real estate is secured using a loan. While this may sound like a downside, it is not because if you need to pay UBIT it means that your investment is yielding good returns.

2. You or a Disqualified Person Cannot Enjoy Indirect Benefits from Your IRA Real Estate Investment
You can neither use your self-directed IRA to buy a vacation home that you would use occasionally nor to rent an office space for personal use. The purpose of your self-directed IRA is to generate retirement income and so, it cannot be engaged in any transaction that benefits you or a disqualified person in any way as that would be considered as an “indirect benefit”.

3. Buying Real Estate with IRA is Possible Without 100% Funding from Your Self-Directed IRA
You don’t have to make an outright purchase or pay the full amount from your self-directed IRA to purchase a property. You can partner with someone or use undivided interest for this purpose. You can also consider the option of funding an investment using your IRA but you must ensure that it is properly structured.

4. Helps Diversify Your Holdings
Self-directed IRA allows the investor to invest beyond stocks and bonds with lucrative investment options like precious metals, personal equity, real estate and more. IRA real estate investments not only help diversify the retirement reserve but also provide rich rewards in the long run for a financially secure future.

5. IRA-owned Real Estate Investments can Be Passed on to Future Generations
At times IRA real estate investments appreciate in value and then, this investment along with its valuation and tax benefits can be passed on to your future generations if you designate them as your beneficiary.

6. Your IRA Cannot be Used for Purchasing a Property Owned by You or by a Disqualified Person
IRS regulations prohibit you from purchasing any property that is currently owned by you. So according to the rule, you are not allowed to make any self-dealing transactions like buying real estate with IRA or selling your property to a disqualified person.

7. Buying Real Estate with IRA has Several Tax Advantages
All the capital gains and earned income from your IRA real estate investments receive the benefit of being tax-deferred. If your investments are made using a Roth IRA, both your income and gains are tax exempted.

With a self-directed IRA, you can invest in several real estate transactions like apartments, farmland, new construction, mortgages, vacant land, resorts, or real estate investment trusts. However, if you obtain a non-recourse loan, the property must generate rental income and the real estate debt-to-equity ratio must be 60 to 70%.

Now that you know the rules, make your retirement account work your way with a self-directed IRA and enjoy the rewards!

Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last 10 years has turned his focus to self-directed accounts and alternative investments. Rick regularly posts helpful tips and articles on his blog at SD Retirement as well as Business.com, SAP, MoneyForLunch, Biggerpocket, SocialMediaToday and NuWireInvestor. If you need help and guidance with traditional or alternative investments, email him at rick@sdretirementplans.com.

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