Using Your IRA To Invest In Real Estate
Investing in Real Estate With Your IRA
Did you know that it is possible to use your retirement fund to invest in real estate? While not widely publicized, your IRA is one of the best tools available out there to invest in, and profit handsomely from, real estate. The process is farily simple and offers you the chance to grow your retirement fund tax free, a proposition that you’re unlikely to find anywhere else. I’ll detail everything you need to know to get started using your IRA to invest in real estate.
Open a Self Directed IRA
Traditional IRA’s and Roth IRA’s are geared to be used for securities and thus are not eligible to be used for the purposes of real estate transactions. You will need to open what is known as a self-directed IRA account. These accounts are offered by specialty providers and can be found easily with a google search of “self directed IRA”.
A self directed IRA basically means that you have opened up an IRA in which you tell the custodian (the company you opened up the account with) how and where to invest your funds. You maintain full control over the account as well as where the money goes and how it is invested. If you tell the custodian that you wish to invest in real estate they will direct the correct amount of funds to the seller of the property you wish to purchase.
Purchasing Property with your IRA
Many self-directed IRA’s will allow you to buy either developed or undeveloped land, commercial or residential, even foreign land or property. Do not worry if you dont have the total amount needed in your retirement fund to purchase the property, the IRA will allow you to invest whatever amount youd like as an “interest” in the property. You can even combine interests in the property with other investors who are also using their IRA’s for the purchase.
Limitations on Investing
The IRS will not allow you to use the property that you have purchased with your IRA as your primary residence or vacation home. The property has to be used for investment purposes and personal interests can end up costing you dearly in the form of additional taxes or penalties. You are also not allowed to take a property that you already own (or that any direct family members own) and place it in your IRA. The property must be purchased originally by your IRA in order to be eligible.
How to Operate Property held in your IRA
Once the property is being held in your self-directed IRA, you must take great care how you operate it to avoid additional costly fee’s or penalties. All funds used in maintaining or operating the property must be taken from the IRA account used to purchase the property. In addition, all income generated from the property must be deposited in the IRA account, it cannot be used for personal use. If you dot have enough money in your IRA, you must withdraw the property from the IRA account which will cost you a pretty penny in taxes and penalties.
What happens when I retire?
At age 59 1/2 you are legally allowed to withdraw any money or property in your IRA without any IRS penalties. You have two possible decisions to make when this time comes: sell the property or take an in-kind distribution (meaning that you will own the property outside of your IRA and are free to do with it what you wish).
Investing in property with your IRA is one of the smartest strategies you can use as a real estate investor. The tax deferred ability of the IRA allows your property to increase in value rapidly while limiting your tax exposure. Whether your retirement strategy is to hold properties or buy and sell for gain, real estate investing through your IRA can yield extraordinary returns toward your future retirement.
May 25th, 2009 at 1:01 pm
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