How You Can Invest In Real Estate Using A Self-Directed IRA

What is a Self-Directed IRA?

An Individual Retirement Account (IRA) is a type of savings account that is designed to help you create a healthy nest egg for your retirement while offering multiple tax benefits. However, regular IRAs limit your investments the more traditional assets options such as to mutual funds, stocks and bonds. Whereas a self-directed IRA allows you to go beyond that and broaden your portfolio by investing in other avenues such as real estate, private equity, franchises, etc. instead of letting the financial institution make your investment decisions.

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Since self-directed IRAs allow you to diversify your portfolio, a growing number of retirement savers are now choosing to invest in real estate to increase their overall returns. But real estate investments done through self-directed IRAs come with its own set of rules and regulations.

How to Get Started?

In order to invest using a self-directed IRA, the IRA must be held by a qualified trustee or custodian, who can provide administrative services such as maintenance of records, issuing client statements and providing information pertaining to government rules and regulations. Another point to note is that a self-directed IRA also requires you to accurately value your investment annually and report the value to your IRA custodian.

Once you have your IRA set-up all figured out, take a note of the dos and don’ts of using your self-directed IRA to invest in real estate.

You can purchase land or property win your IRA as long as it wasn’t previously owned by your or your family members (this includes your spouse, parents and your children). You are also prohibited from selling any property to your spouse, family or any other relative. This rule also extends over leasing of property to family members as they are considered as disqualified persons under the IRA laws.

While purchasing a property through your IRA, all property related expenses must be paid using your IRA and thus you must ensure you have sufficient cash in the account. This is because using external capital to fund the management expenses can lead to the loss of tax benefits, or penalties.

When renting out your IRA property, tenants must address their rent checks directly to the IRA and not you, personally. This is imperative as accepting rent checks personally could trigger penalties as it is considered to be a prohibited transaction in case of self-directed IRAs.

You are not allowed to use any property bought using your IRA as a family/vacation home as all properties owned through your self-directed IRA as designed to bring you benefits only upon retirement and not earlier than that.