Buy Real Estate with Your IRA: Here's How

For more than 30 years, savvy real estate investors have used Individual Retirement Accounts (IRA) to purchase virtually any kind of fee-simple investment real estate, including:

• Raw or developed land
• Single & multi-family homes
• Condos, co-ops & townhomes
• Apartment buildings
• Commercial property

To do so, investors must open a Self-directed IRA with an IRS-approved Administrator, Custodian or Trustee and then have their retirement plan funds transferred or rolled over to their new account. Self-directed investing is regulated by state and federal banking regulations and IRS tax law. The term ‘Self-directed’ investing simply means that the investor chooses the specific asset to invest in, unlike purchasing a mutual fund, where assets are chosen by fund managers and other entities. Self-directed IRAs are no different than conventional IRAs, except that they allow investment in non-traditional assets, such as real estate and other investments.

With a Self-directed IRA funded account, individuals can invest in real estate in many ways. If the Self-directed IRA has sufficient funds, the IRA can purchase the property outright; the asset is held in the IRA. As owner of the land, the IRA must have sufficient funds to pay property tax, etc. Investors can also ‘partner’ with themselves or other qualified persons to effectively extend their purchasing power. Imagine having personal funds and IRA funds to effectively purchase the property such that each share would own “an undivided interest” in the property, which means they share all expenses and profits based on that pro-rata share. Similarly, investors have used legal entities, such as a Limited Liability Company (LLC) and Limited Liability Partnership (LLP) to invest in real estate. Finally, investors can direct their IRA to actually take out a mortgage to purchase rental property. These are called ‘non-recourse’ loans which are procured from specialized lenders and the loan’s repayment must come from contributions to or income from the property in the plan.

Self-directed IRAs offer substantial tax advantages that have made many millionaire investors. The greatest advantage is that IRA investors pay no capital gains tax when the property is sold by the IRA. In addition, because the profit from the sale is deposited back into the IRA with no tax on gain or growth, the investor enjoys the power of compound interest to invest in the next real estate deal. Although IRS 1031 exchanges can be used to fund partial IRA investments in real estate, Self-directed IRAs do not have the same limitations and holding periods, thus are much more flexible. Finally, if you’re like many investors who are tired of poor-performing investments in stocks, bonds and mutual funds, Self-directed IRAs offer true portfolio diversification; i.e., in real estate, to help build wealth via tax-deferred or tax-free income-generating assets! 

Your first step in purchasing real estate is to have a trusted Realtor who is knowledgeable in finding your ideal property. Purchasing real estate with your IRA is very similar to conventional means, but IRS regulations must be observed. As with any investing, it’s always appropriate to have competent advice from tax and legal advisors. Beyond that, the best remedy to avoid problems with the IRS is to become an educated investor by reading or attending a workshop or seminar on buying real estate in an IRA offered by your local Self-directed IRA Administrator.  

For more information on Self-directed IRA investing, contact Julian Acosta, Director, Business Development for Entrust Administration Services in South Florida. Call 954-331-8072 or toll-free: 866-561-4472 or email at: jacosta@entrustfl.com.