IRA Real Estate Investing

An IRA can legally own real estate. You can purchase real estate with funds from a self-directed IRA. Income generated from the real estate can be TAX DEFERRED and in some cases TAX FREE! Take note, that it’s not easy and quite complicated but it is doable.

Real estate has historically proven itself to be a great vehicle for both income and appreciation. One real estate tool that is available to real estate investors are government sponsored retirement plans. You may not be aware that you have the option to direct your IRA into real estate.

Types of property you can own via your IRA:

  • Single family homes
  • Apartment buildings
  • Condominiums
  • Mobile homes
  • Raw land
  • Commercial property

IRA Types

There are two different types of IRA’s:

      1. Tax deferred – These are the “tax deductible” kind of IRA’s that allow yearly contributions to a tax-deferred account with pretax dollars. This means that the money you deposit in your IRA is not taxed and you will not be taxed until you withdraw the money when you retire.
      2. Tax free – These are tax-free retirement accounts. Also known as the Roth IRA, yearly contributions are made with after-tax dollars. These offer no tax advantage in the year the contribution is made because the Roth IRA contribution is not deductible. The advantage of the Roth IRA is that the growth of the retirement account is tax-free as well as the income disbursements made from it when you retire.

Both IRA types can be used to invest in real estate. For obvious reasons, most people would prefer to have the Roth IRA as the vehicle for real estate investment because all income and gains resulting from real estate transactions would be tax free. The fact of the matter is that most people have the traditional IRA. Although the income from the traditional IRA isn’t “tax-free”, it is “tax-deferred”.

First-Time Homeowner’s IRA Break

If you are a first time homebuyer and you have a regular IRA, you can withdraw up to $10,000 from your IRA to help pay for qualifying “first-time” home buyer expenses. The $10,000 limit is a lifetime cap per IRA owner, not an annual limitation.

The expenses qualify if they are used within 120 days of the distribution to pay the acquisition costs for your new principal residence.

The rule says that the tax break is only available for “first-time” home buyer expenses, but it doesn’t mean that it must be your first residence. A qualifying first time home buyer is someone who did not have a ownership interest in a principal residence in the two year period before the acquisition of the new home. If you are married, you and your spouse must satisfy the two year test.

Note that the IRA imposes a 10% penalty if you receive a distribution from a traditional IRA before age 59 1/2. You are exempt, as explained above, if you use the distribution for qualified first-time home buying expenses. If the money is from a ROTH IRA however, the money must have been in the IRA for at least 5 years.

Self-Directed IRA

The IRA’s above generally don’t offer a way to use the funds in the IRA to invest in real estate. The self-directed IRA does. With the self-directed IRA the investor has greater control over how his or her IRA funds are invested. They present the investor with the means to invest in real estate. There are hundreds of companies, or “administrators”, that offer self-directed IRAs. You need to make sure that the company you look at allows the IRA to invest in real estate before you give your money to them.

Once you find an appropriate self-directed IRA, you will have to roll over your existing IRA retirement accounts to one of the the administrators offering the real estate investment option. Most traditional IRA, Roth IRA, Simple, or Keogh type of retirement account can be converted to a self-directed IRA. Your IRA administrator will help you determine the steps needed to do so.

IRA real estate investing example 1: Heather is a simple homeowner who owns a couple of rental properties. She has an IRA with sufficient funds to purchase another rental property. Heather converts her Roth IRA to a self-directed IRA and instructs the administrator to purchase the rental property she wants. She eventually purchases the house and rents it to a couple. The income she receives in the form of rent is tax free. Also, if Heather were to sell the house 3 years or so down the line, the profit from the sale wouldn’t incur ordinary income taxes either. All profits would go into her IRA account and continue to grow until she retired.

IRA real estate investing example 2: Jess purchases a parcel of land in Ventura, California because in the last several years the real estate market has exploded in the area. He purchases this land with the hope that it will grow in value as well. To make it more attractive he subdivides the land with the goal of selling it in smaller parcels. Jess purchases the land from his self-directed IRA and instructs the administrator to buy the land with his IRA funds. Over time the smaller parcels are sold and all the profits from the sales would go into his regular IRA account and continue to grow, shielded from taxes, until his retires.

Note that if you purchase a “fixer” in an IRA, the funds that are needed to make repairs must come from the plan itself. Any payment from outside the plan would disqualify the transaction.

The fact is that real estate investing within IRA’s is one of the best kept financial secrets around.