Real Estate IRA
Yes, but you cannot live in it until you take it out of the account via a distribution. While the home is part of your IRA, you can rent it out to other unrelated parties and grow your IRA with the rental income. Then, when you are of age to retire, you can take the property out of the account as a distribution, make the necessary tax filings, and live in it as you please.
There are a number of different Real Estate IRA platforms and each one is uniquely suited for different kinds of investments. Here is a short summary of the most common scenarios.
- Private Placement – If you are going to be investing retirement funds in a Private Placement (e.g. a real estate venture being fully managed by a third party), then a custodial Real Estate IRA would be perfect. It has a simple set-up and very low fees. (Just make sure to choose a flat rate Custodian as opposed to one that charges asset based fees). Maintenance is easy and the lack of transactions needed on your part will keep the fees down.
- Fix and Flip – Properties that need renovations are transaction heavy and you need a platform that is optimized for that. A Real Estate IRA using an IRA LLC would be the right choice as there are zero fees transactions and you do not have to go through the middle-man Custodian to get them done.
- Rental – Rental properties also experience a large volume of transactions. Maintenance, rent checks, supplies, and service calls happen on a regular basis. For this reason it’s usually more economical to go with the IRA LLC.
Yes, the IRS allows such a rollover. However, sometimes it’s not practically feasible as your 401(k) may be locked in with your current provider for the duration of your employment. Speak with your plan administrator to find out what your options are.
Yes. Aside from the obvious tax benefit of taxes being deferred until distribution, there is another benefit that is unique to a Real Estate IRA. Your IRA can actually avoid the tax bill for depreciation if it pays off the property at least a year before it sells it. Ask your accountant if this would apply in your situation.
No. Your son is considered a Disqualified Person and may not receive any benefit from an active IRA asset.
This is really a question to pose to your accountant or financial advisor. One of the factors that you might want to look at first is the expected duration of the investment. If you are looking for something short term, then a retirement investment presumably doesn’t make sense. There are penalties for early withdrawal and unnecessary paperwork. However, if you are looking to make a long term investment, then locking up the asset should not pose a problem. In that case, discuss with your financial advisor if the tax benefits of retirement investing are a good fit for the specific strategy that you have in mind.
There are a number of ways to make a distribution.
- You can use cash assets instead of liquidating the property. Often investment properties will have accumulated rental income which can be used for a RMD. Similarly, if you have other retirement accounts, the RMD can be fulfilled via distributions from those accounts. The requirement for taking a Required Minimum Distribution is one associated with the individual account holder, not with each specific account.
- You can sell the property and the cash proceeds will be deposited in your IRA account.
- You can make an in-kind distribution which re-titles the property from the IRA account to you. In such a case a qualified appraisal would be necessary to determine the value of the property for tax filing.
Yes. Even though you are doing something of value for the property, the IRS allows for the account holder to perform general management duties. To find out the specifics of what you may or may not do for the property, please look at the guidelines regarding Sweat Equity. Keep in mind that even when the management activities are permitted, you may not accept compensation for them.
No. This would be considered a non-cash contribution to your Real Estate IRA. Instead, you’ll have to use your IRA funds to hire a third party contractor to install the new roof.
No. A parent is a Disqualified Person and buying a house from them would constitute a Prohibited Transaction.
Yes. When planning out an investment strategy, a loan can certainly be factored in. If you’re thinking about doing so, keep in mind two relevant items.
- The mortgage/loan has to be in the form of a non-recourse loan. That means the loan will be secured fully by the property itself. To find out more about this kind of loan, please visit our information page Non-Recourse Loans.
- When your Real Estate IRA invests by utilizing a loan, the account can be subject to a tax filing known as UDFI – Unrelated Debt Financed Income. Simply stated the percentage of the asset that can be attributed to outside funds (i.e. the loan) is taxable. You can learn more about UDFI here.
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