The Basics of an Ira Real Estate Investment
from the SageRealtor Newsletter Archive
In this issue, we highlight a little-known IRS provision that lets you extend real estate purchasing with tax-deferred dollars.
Using self-directed IRAs some investors are now purchashing retirement dream homes well before their retirement years.
According to Realtor® Magazine here’s how it works: your IRA account buys the home now as an investment, leases the home (it must in fact be operated as an investment property), and then you withdraw the property at retirement age (currently 59 ½ + for penalty-free withdrawal). At that time, you can elect either to have the IRA sell the property or take an in-kind distribution of the property.
Just like any other investment an IRA holds, the IRA can sell or buy properties any time.
Most banks and brokerage companies—the most common IRA account options—limit your choices to certificates of deposit, stocks, mutual funds, annuities, and similar financial instruments. But Section 408 of the Internal Revenue Code permits individuals to purchase land, commercial property, condominiums, residential property, trust deeds, or real estate contracts with funds held in many common forms of IRAs, including a traditional IRA, a Roth IRA , and a simplified Employee Pension plan, or SEP-IRA.
You can also can have your IRA purchase an interest in the property in conjunction with other individuals, such as a spouse, business associate, or friend.
Self-Directed IRA Custodians
You’ll want to locate an independent IRA custodian that allows real estate investments and work with that company to set up an IRA account. The IRA account holder can’t serve as the custodian of his or her own account. So it’s important to select a custodian knowledgeable about the types of investment you’re interested in (the custodian holds title to the real estate).