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Using Your IRA to Invest in Real Estate

retirement Aug 28, 2020


Using your IRA to purchase real estate has been allowed since 1974, though not many people knew about this until recently. Regardless of when you became aware of this option, there are a few rules to be aware of before you get started.

With your IRA, you have the ability to invest in nearly any type of real estate: malls, warehouses, boat slips, and cemetery plots, as well as the more typical houses and apartment buildings. The common exceptions are your personal residence and personal vacation homes.


Important IRS Rules


When investing in real estate through your IRA, be sure to note these IRS rules:


  1. The self-dealing rule. The big rule (that's also a little vague) is the "self-dealing rule," which basically states that you cannot receive immediate personal benefit from the transaction. For example, you can buy a cabin in the woods and rent it out for income. However, you can't use it as a vacation property for yourself.


  1. The sweat equity rule. You're also not allowed to invest "sweat equity" in any of the investments. So you can't renovate a house yourself, but you can pay someone else to do the work.


  • This rule means you'll need to focus on really great deals that will justify the expense of hiring professionals to do your rehab work.


Benefits of Investing in Real Estate Through Your IRA


  1. Using the split option. An interesting option is the ability to split the ownership and the proceeds. You can really use this to your advantage!


  • For example, let's say you purchase a property and pay for half of it with your IRA and get a loan for the other half. When you rent or sell the property, half of the funds would have to go back into the IRA. The other half would go into your bank account.


  • However, although you don't have to fund the entire purchase with your IRA, keep in mind that any costs associated with the operation of the property would have to be paid from the IRA (or 50% in the example above).


  • To do otherwise would be the equivalent of making a contribution to the IRA. And all contributions have to be made through the normal mechanisms. So if you invest in real estate through your IRA, your accounting needs to be impeccable.


  1. Tax advantages. Also, there are significant tax advantages to investing in real estate with your IRA. Consider that with a traditional IRA, no tax would be owed on any capital gains until you begin making withdrawals at retirement.


  • With a Roth IRA, no taxes would be ever owed on any capital gains! All the capital gains will be available for additional investments, and this is a huge advantage over using your savings for your investments.


Using your IRA to invest in real estate can be one of the smartest ways to go about this kind of investment. You can fund the down payment, allowing the purchase of real estate without using out-of-pocket funds. Also, the tax advantages are huge, especially long-term.


Speak to your financial planner before you take the plunge. As with any investment, professional advice can spare you a lot of headaches later.


While there are rules to keep in mind, drawing from your IRA isn't a particularly complicated way to fund real estate investments. The advantages are well worth the few limitations you must work around.  Your retirement account will thank you for it!


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