Real Estate IRA

How To Buy Real Estate with an IRA

Can an IRA Own Real Estate?

Yes. It’s perfectly legal for an IRA to own real estate as a retirement asset. The IRS allows for most assets and there are very few that may not be placed in a retirement account. The reason why you may have never heard about real estate being placed in an IRA is that most IRAs are managed by banks and brokerages. Their systems are set up to focus almost exclusively on stocks and other Wall Street products. For assets that are not typically serviced by brokerages, an investor would have to turn to a Self-Directed IRA. This kind of IRA is held by a specialized Custodian whose systems are optimized for alternative assets like real estate.

The Takeaways

The first step in buying real estate with an IRA is to open an account with a Self-Directed Custodian.
With a checkbook-style IRA (such as an IRA LLC), account holders can buy real estate just by writing a check.
In a standard Custodial Self-Directed IRA, a property can be purchased by submitting an Investment Authorization form.

How Does an IRA Buy Real Estate?

There are a number of different platforms that an IRA can use to buy real estate. They include:

Custodial Self Directed IRA

The Custodial Self-Directed IRA is a great beginner platform and is the most “hands-off” of the various options. It possesses a simple set-up process, a low set-up fee, and utilizes the Custodian for all transactions. You start by opening a new Self-Directed IRA Account and rolling over your funds from an existing account. Then, each transaction after that is handled by a new form and request to the Custodian. In the case of real estate, you would start off by deciding on the property you wish to purchase. Then, you would inform the Custodian (via an Investment Authorization form) that you want your IRA to purchase the property. The Custodian will execute the purchase and let you know of any additional paperwork that they require. Once the purchase is completed, that piece of real estate is now a retirement asset in your IRA. When you decide to sell the real estate, just inform the Custodian. They will handle the sale on your behalf and deposit the proceeds back into your IRA.

While the Custodial Self-Directed IRA sounds like the perfect platform to buy real estate with your IRA, it really only works well in a limited number of cases. When the investor’s involvement with the real estate will be minimal, the Custodial platform is amazing. It is easy and economical due to the low number of transactions performed. This would be the case with a real estate investment like a Private Placement. However, with more typical real estate investments like a multi-family, the Custodial model would not be the best choice. The Custodian charges for each and every transaction and that can quickly add up in a hands-on property. For those real estate investments, you would be better served by one of the following IRAs.

IRA
LLC

An IRA LLC is a retirement account that is great for high transactional assets. Although it has a higher set-up cost, this account saves a lot of money in the long run by getting rid of transaction fees. It does this by empowering the investor with the ability to perform transactions themselves. Here’s how it works:

The Self-Directed IRA facilitator sets up the investor with a dedicated LLC.
The investor opens up a checking account in the name of the new IRA LLC.
The LLC is funded with the investor’s IRA funds.
The investor can make any transaction merely by writing a check from the IRA LLC’s checking account. No interaction with the Custodian is necessary. This saves both the transaction fees and time waiting for forms to be processed.
For real estate, the investor would choose a property and then purchase it by writing a check. Because it was purchased with the IRA LLC, it automatically becomes a retirement asset.

The IRA LLC is a great option for buying standard real estate and performing any required maintenance. The only downside can be the fees. While in most states, the IRA LLC will be a cost-effective platform, there are a few states that place high taxes and fees on LLCs. For those states, the IRA Trust may be a better option.

IRA
Trust

An IRA Trust is another powerful tool to buy real estate. A Trust is a standard financial account that holds funds or varying assets. In an IRA Trust, the account holder functions as the Trustee and can manage the account for the benefit of the IRA. The Trust is similar to the IRA LLC in that it can use a dedicated checking account to make purchases and transactions, but it also provides additional benefits.

These benefits include:

Savings – An IRA Trust is not subject to any LLC fees.
Expedited Processing – An IRA Trust can typically be established in four business days. This contrasts with the IRA LLC which can take 2-3 weeks to set up. The IRA Trust enables IRA investors to buy real estate, even with a tight deadline.
Reduced Reporting – An IRA Trust does not require a foreign agent when doing business in another state. It also is not required to file an Articles of Organization in its own state.

However, the IRA Trust is not suited for buying real estate in all situations. An IRA Trust cannot function as a multi-member account, nor can it buy a property that will utilize a non-recourse loan. If an IRA investor is interested in buying real estate with an account that uses a checkbook, it is highly advisable to discuss the investment beforehand with a Specialist. You will be able to get an educated opinion and find out which account is best suited for your investment.

Solo
401(k)

A Solo 401(k) is another Self-Directed retirement account that can buy real estate by using a dedicated checkbook. What sets it apart from the IRA LLC and IRA Trust is the fact that is optimized for those with self-employment income. This allows for higher contribution amounts and the possibility of a personal loan. For self-employed investors, the Solo 401(k) is the go-to choice for buying real estate.

Interested in Real Estate?

Learn more about purchasing real estate with your retirement account.

Can a Roth IRA Buy Real Estate?

Yes. A Self-Directed Roth IRA can buy real estate. Each of the various Self-Directed platforms (Custodial, IRA LLC, IRA Trust, and Solo 401(k)) can be opened as a Roth and can then purchase real estate accordingly.

Should I Cash Out My IRA To Buy a House?

It depends on what you mean by cashing out. If what you’re looking to do is purchase a house for personal use, then you do have to cash out your IRA. You will have to pay the deferred taxes immediately, as well as any relevant fines. However, if the house is being purchased purely for investment purposes, then you do not need to cash out your IRA. Your IRA can be set up with a Self-Directed Custodian and you can purchase the house as an investment asset. The only limitation placed on buying real estate will be the consideration of Prohibited Transactions. In the case of a house, this would mean that your IRA would not be able to purchase the house from yourself or one of your close relatives. Similarly, your IRA could not buy an unrelated house and then rent it out to a close relative. For more information on these kinds of transactions, please visit our Prohibited Transactions page.