Confused about IRA’s and Real Estate? Don’t be!
The term “real estate IRA” covers any type of real estate investment made from within a self directed individual retirement account or 401K. You can hold a deed to real estate in IRA and other IRS approved retirement accounts, with no problem, as long as you follow the “rules”.
Funds from the account may be used to purchase residential or commercial property. The account can make loans to individual’s with property to use as collateral, just as a bank does. Those are just some of the things that you can do with a real estate IRA.
The real estate in IRA or 401K accounts cannot be property for personal use. In other words, the deed to you home or the building you work in cannot be held in the account. Large tax penalties are assessed for transactions that are considered self-dealing or indirectly beneficial. You should learn all about prohibited transactions and self-dealing before you begin.
A real estate IRA can be used for long-term or short-term investments. The account can hold property solely intended to generate rental income. All expenses related to the property must come from the account and all rental income must be returned to the account.
A little paper work is involved, but if you choose a custodian familiar with these types of investments, it’s not really much of a hassle. Renters simply make their checks out to the custodian’s or company’s name “for the benefit of” or FBO your real estate IRA.
You and your retirement account are separate legal entities. You’ll have problems if the renter makes a check out to you and then you make one out to the account. It’s best if the renter or the rental agency knows in advance how payments are to be handled.
Holding rental properties are long-term investments. You may eventually decide to sell the property or it may be sold when or if the account is liquidated to be distributed to a beneficiary or yourself.
A short term investment may return a profit more quickly and allow you to make more money for your retirement in a shorter period of time. For example, you could hold a piece of real estate in IRA or 401K accounts that needs to be renovated in order to increase its value. This is sometimes referred to as rehabbing.
As with the rental property example, all of the expenses come out of the account. All of the profits are returned to it. There are two big advantages to dealing real estate in IRA accounts. Number one of course is big returns. If you make smart choices, your rate returns (income or profits) will be much higher than with more traditional investment types.
The second advantage is the tax free or tax deferred status of the account. Experienced rehabbers and similar investors have learned that they pocket more profits by using a real estate IRA than they would if they used personal funds.
So there you have it…if you’re interested, get some good advice; join a group of investors or a club. Knowledge is the key to successful trading!