Holding Real Estate in Your Self-Directed IRA

If you want to buy an investment property, but don’t have the cash in a non-retirement account, consider this: An individual retirement account (IRA) can legally own real estate, as well as other alternative investments, such as gold and oil.

Large financial institutions that act as custodians for most IRAs typically limit investments to stocks, bonds, cash, mutual funds, and other such traditional investments. But smaller custodians offer what are called self-directed IRAs, which allow assets to be invested in alternative investments such as real estate.

Although the Internal Revenue Service (IRS) allows self-directed IRAs, you have to be sure to follow the rules, and the big one is no “self-dealing” is allowed. In other words, you can’t use an IRA to buy property that benefits you or certain family members, even indirectly. So, you can’t live in the property; even renting it to yourself is a prohibited transaction.

There are also tax implications if there is debt associated with an investment in a self-directed IRA, such as a mortgage – which will certainly be the case unless you buy the property in full. Because there is financing involved, some of investment income may be taxable.

Additionally, when it comes time to take required minimum distributions from the IRA, you may have a hard time determining the value of the assets and therefore the amount of the distributions. Tax penalties will be levied if you take the wrong distribution.

At the end of the day, there are a number of risks and rewards associated with self-directed IRAs.

However, before pursuing one, it’s a good idea to talk to your advisor; he or she will ensure that you know what you are getting into when investing in a self-directed IRA and offer guidance on the best way to go about it.

The information contained in this article is merely a summary of our understanding and interpretation of some of the current laws and regulations. We cannot give tax advice.