Ask the Experts: Can my self-directed IRA invest in real estate?

Ask the Experts: Can my self-directed IRA invest in real estate?

Yes. Your IRA can invest in virtually any form of real estate. That includes direct ownership in property as well as indirect ownership through limited partnership interests, REITs, and mortgage obligations. Your IRA can buy a beach house, a multi-family home, commercial property, raw land, time shares, condos, an island–almost anything. Your IRA can be the sole owner of the real estate, or a partial owner with others.

Your IRA can even borrow money to purchase real estate. However, it may be difficult to find a bank that will lend money to your IRA (since you can’t personally guarantee the note). Borrowing may also cause some of the income (or sales proceeds) from the property to be taxed currently to your IRA under the UBIT (unrelated business income tax) rules.

When you invest in real estate you’ll also need to pay particular attention to the prohibited transaction rules. You can’t, for example, sell property you already own to your IRA. And neither you nor certain family members can use real estate while it’s owned by your IRA. That sort of self-dealing can result in your entire IRA becoming taxable to you.

Keep in mind that when you hold real estate in a traditional IRA, you’ll have to pay tax at ordinary income rates when your account is ultimately paid out to you–whether you receive cash or the property itself.

Qualified distributions from a self-directed Roth IRA, on the other hand, are free from federal income tax, which makes the Roth IRA an attractive vehicle for real estate ownership. Say you’ve found your dream retirement home. You could have your Roth IRA purchase the property, rent it out to generate income, and then, when you’re ready to retire, have the IRA distribute the property (and any income) to you tax free.

Finally, note that you’ll need to pay any expenses related to your real estate investment out of your IRA, so make sure it will have enough cash each year to cover any real estate taxes, legal fees, repairs, insurance, and other costs.