5 Things You Should Know About Owning Real Estate Within an IRA

Owning real estate in an IRA is often classified into its own category when it is actually a type of investment that you can make with a self directed 401(k) or IRA. Recently, many people started to inquire about making these investments due to the inordinate amount of foreclosures and home short sales available on the market.

The truth of the matter is that a real estate IRA has been around just as long as a traditional IRA or a self directed IRA. In 1974, the Social Security Administration passed ERISA in order to help supplement social security retirement funds. Ironically, self directed IRAs have been around for over 30 years, but many people still treat them like it’s a new trend.

For this reason, it’s a good idea to do a lot of research before you choose your custodian or trustee. Many self directed IRAs are not truly self directed. The options may be limited, and you will have to make sure that you aren’t restricted from real estate in an IRA. If they have been performing these sorts of transactions for decades, they should help ensure that the paperwork is filed according to IRS rules and regulations.

When investors are first considering real estate for retirement funds, they usually have a lot of questions. The first thing to remember is that many of the rules that apply to an IRA will also apply here.

There are a few additional things to keep in mind with real estate in an IRA.

1. You may not purchase real estate for your IRA that you or any disqualified person owns. Disqualified persons include anyone in your lineal descent including children, grandchildren, great grandchildren, parents, grandparents, and great grandparents. If you previously owned it, you may not purchase it. This is what the IRS refers to as self-dealing and will penalize anyone that does it.
2. You may not participate in “indirect benefits” of your real estate IRA. That means no using a vacation home by you or any disqualified member. Also, no renting office space in a commercial investment property. Your real estate is intended for retirement for your benefit in the future, not now.
3. All real estate must be titled as a separate entity from your self. You must title your IRA account and have all documents reflect the retirement plan’s name rather than your personal name. You could expect delays if anything is not titled as such.
4. All expenses and income must be made through the IRA. You aren’t allowed to have any funds in your hands personally. Likewise, all expenses including property taxes, homeowner association fees, bills, and maintenance or improvements must be deducted directly from your account.
5. Your real estate purchase can be made in a variety of ways. Your options don’t stop with an outright purchase from funds in your self directed retirement plan. You may also partake in partnerships (with the exception of S corps) or a loan that doesn’t use the SDIRA as collateral.

What we have covered in this article is just a few quick pointers to be aware of. Before you make any investment, and especially a self directed one, you should always research and ask questions. Your passive custodian is there to help ensure that you know the answers to rules and regulations, but you still need to educate yourself concerning owning real estate within an IRA. Ultimately, you are in charge of creating lasting wealth for you and your family.