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Purchasing Rental Property with Your IRA

When structuring an IRA (individual retirement account), many people make use of stocks, bonds, exchange-traded funds, and mutual funds for investment. Another option is to hold real estate under the IRA. By purchasing rental property with IRA you gain access to a profitable option for your retirement account. However, there are several rules you have to follow if you choose to make such an investment.

  • While holding real estate in an IRA is possible, it needs to be a self-directed IRA for you to do so.
  • The real estate you invest in through your IRA must be used for investment purposes, such as a rental property, you can’t use it as residence.
  • When making a real estate purchase, you generally have to pay in cash, while the IRA covers associated ownership expenses.
  • You have to keep considerations in mind such as taxes and general documents and red tape. That being said, the property can offer a high rate of return and further diversify your portfolio.

Self-Directed IRAs

A self-directed IRA is one independent of a brokerage, bank, or investment company that will make choices on investments and enforce certain guidelines. With a self-directed IRA, you make all the choices for your holdings and how the IRA is used. When building a self-directed IRA you still have to make use of a custodian who specializes in these types of IRAs. The custodian manages the transaction, any needed paperwork, and proper reporting. Your custodian also makes sure you follow the rules and don’t break any laws.

Use of the Property and Other Rules

Any property in your IRA is strictly an investment. You can’t use it as a primary residence, vacation, a home for your relatives, a second home, a business location, or an office. You are also not the only person excluded from these actions. The IRS also bars your spouse, parents, grandparents, children, grandchildren, your IRA service provider/custodian, any other entity that owns more than fifty percent of the property in question, and other family members such as great-grandparents and great-grandchildren. Also, you can’t purchase the property from any of the persons or entities listed above as this is considered self-dealing. In addition, you can’t purchase any property you already own through your IRA as a form of transfer. The rules are quite strict and your custodian will assist to ensure you are following them.

Pros of Owning Property in Your IRA

There are many reasons to consider adding a property to your IRA and diversifying past the traditional stocks, bonds, and ETFs most IRAs contain. These include the following advantages.

  • You can greatly increase your return on investment in your retirement savings by adding a valuable asset.
  • You diversify your portfolio in a way that moves counter to wider financial markets, adding a degree of protection from uncertain and unpredictable events. Having a rental property can be an excellent hedge against economic fluctuations, uncertainty in the economy, and inflation.
  • Real estate broadly appreciates over time and with IRAs trending to be long-term investments, the long time frame you have makes real estate a good fit.
  • The profits you earn from a rental property allow for growth in your IRA that are tax-free. This also provides a steady income stream to grow your IRA.
  • When you purchase property through an IRA you can buy, flip and sell property like you would normally. You can also purchase other properties and build a broad portfolio of properties within your IRA.

Final Thoughts

Real estate is not without its risk as a purchase and this includes as a part of your IRA. There are associated costs and upkeep to keep in mind. However, with proper research and the guidance of a custodian to guide you through the sale and paperwork, it can be a chance well worth taking.

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