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Holding Real Estate Investments in your IRA: Can it be Done?

DFY Real Estate

When it comes to retirement planning, diversification is the name of the game. Most retirement accounts allow investors to hold stocks, mutual funds, bonds, and Exchange Traded Funds (ETFs). But there are ways to add different asset classes, giving you a more balanced investment portfolio. Adding a stable, long-term investment in the form of real estate can help.

Yes, you can own property in a retirement account. Let’s look at ways to invest in real estate using your IRA. There are two basic ways you can accomplish this.

Real Estate Investment Trusts (REITs)

REITs are companies that finance or own real estate. Buyers can purchase shares in these companies, similar to purchasing more traditional stocks or mutual funds. They can easily be held in a retirement account and do not require a self-directed IRA.

REITs can own property in sectors ranging from self-storage to student housing to office space.

One big downside to REITs is that you don’t control what properties are purchased or what decisions are made about those properties. You are at the mercy of someone else’s business decisions.

Because of the downsides of REITs, we are going to look primarily at the method that allows you to select your properties carefully and make decisions about managing them: the self-directed IRA.

Self-Directed IRAs

Available as both a traditional and Roth individual retirement account, a self-directed IRA (SDIRA) allows you to take advantage of a wider variety of investment options within the account. With a self-directed IRA, you can invest in almost any type of asset, including gold, cryptocurrency, or–best of all– real estate.

Unlike most IRAs, however, SDIRAs are not available through many investment account providers. You will need to find an IRA custodian that specializes in self-directed accounts. Additionally, you will want to verify that they offer the type of investment you want to include in your IRA.

Once you’ve set up your account with the help of a special custodian, you can purchase single-family homes and hold them in the IRA. These can then be run just as you would if the property was held outside a retirement account, though expenses and income all must stay within the IRA account.

It is important to note that the custodian for your self-directed account cannot advise you on your investments. You must do the research and take the lead, hence the name self-directed. If you want assistance navigating your options and the market, it is wise to consult your financial advisor.

Four Considerations:

1. Not Your Home Sweet Home

The property you own in your IRA can’t be for personal use. No getting fancy and trying to buy a property and rent it back to yourself. Similarly, you can not own a vacation home in your IRA if you plan to use it, even if it is rented out most of the time.

The property also can’t be used by anyone the IRS considers “disqualified,” including most family members. That means that something like purchasing a property and holding it in your IRA so your child can live in it while they attend college isn’t allowed, even if they were to pay rent to you. You must run the property as a business, clean from any ties to yourself or your family. It is an investment and must be managed accordingly.

2. You vs. The IRA: Who’s the Boss?

The owner of the property will be the IRA, not you. That may not seem like much of a difference, but it means getting a mortgage can be challenging. The best and most common way to make a direct real estate purchase in an IRA is to pay cash using the balance you already have in the IRA account.

IRA ownership also means collected rents go back into the IRA. You as an individual don’t own the property, so you don’t receive the income, but it is available for withdrawal under the terms of an IRA account. As a result, you will have limited access to rent monies. They are subject to the same withdrawal rules as regular IRA contributions.

Expenses associated with the property are paid from your IRA balance.

There is some risk associated with paying for those costs. The annual IRA
contribution limit for 2022 is $6000 ($7000 for those over 50). You could face penalties for over-contributing if you have a year with high expenses and need to contribute more to cover them.

3. Selling

When you decide to sell the property, it is easy to do. You negotiate a sale, just as you would with a standard real estate transaction. Then, you direct the custodian of the IRA to execute the transaction. All of the sale proceeds will go back into the IRA. Even though the property is held in the self-directed IRA, selling is straightforward and relatively simple.

4. Taxes

As with a regular IRA, a self-directed IRA can be a Roth or Traditional account. With a Roth IRA, you contribute money on which you’ve already paid taxes. That means that everything you withdraw, including all growth, is tax-free. Contributions to a traditional IRA are from pre-tax money. Taxes are deferred until you make withdrawals.

The collected rents and even the gains from the sale will be either tax-free or tax-deferred, depending on which type of account you choose for the self-directed IRA. The type of account you choose will determine how much of the money you will have in your retirement.

While it is a less common IRA asset, holding real estate in a self-directed IRA can be a great strategy to add more diversity to your retirement accounts. With its history as a stable long-term investment, single-family houses may be just what your IRA needs to help guide you toward a financially secure retirement.


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