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Owning Real Estate in an IRA

Owning Real Estate in an IRA | Layman Nichols

By Dean ‘Mac’ Nichols, Attorney

In considering their IRA’s, individuals wanting more control, a mix of investments, and an inflation hedge are increasingly turning to investments in real estate products by owning real estate in an IRA. Allowed by Section 408 of the Internal Revenue Code, investing in non-traditional assets such as real estate has been rarely used while trillions of retirement dollars reside in registered securities.

Are self-directed real estate IRA’s for everyone? No, however, for some who already enjoy real estate investing and who want their rental income and capital gains to be tax deferred, this can be an attractive IRA diversification. Also, investing locally becomes possible offering advantages that can be highly desirable. As baby boomers grapple with the prospect of not enough retirement income to foot a future retirement, self-directed real estate IRA’s can bolster that income.

The rules allow the following strategies for a self-directed IRA that holds real estate:

Strategy 1: Partner your IRA.  Invest individually or, to increase purchasing power, partner with another investor, including a relative. The proportional ownership and expenses related thereto must be maintained for the life of the investment.

Strategy 2: Leverage.  Purchase a property with a down payment and a loan from a bank with the property as collateral. The IRA owner cannot be a guarantor on the loan. Though not all banks make these loans, there are lenders who do. Since the IRA is responsible for all of the expenses related to the property, it is also responsible for the mortgage payments making income-producing properties rather than raw land the best option in most instances.

Specific rules apply to who can do business within a self-directed real estate IRA. Direct lineal relatives are disqualified people. An investor may not purchase or sell properties for the IRA from or to these individuals, nor rent to them. Also, properties currently owned cannot be moved into the IRA. Self-dealing restrictions apply. A qualified custodian can spell out all of the applicable rules.

Not a do-it-yourself retirement vehicle, one must exercise due diligence with the help of a qualified custodian who holds the IRA assets, administers the accounts in accordance with the provisions of the Code and regulations (including paying all expenses, maintenance, taxes and insurance) and files the required documents with the IRS. In addition, other needed professionals can include a realtor, CPA, and an attorney.

While the IRA defers gain on transactions in the account, one cannot deduct losses and will not receive capital gains treatment on profits when withdrawn. An investor needs enough knowledge to recognize good investments and to understand the transactions.

If you need assistance with including real estate as a diversification in your current IRA, please contact our team at Layman and Nichols, P.C.

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