Real Estate IRA Investing FAQ

Can I buy real estate in my Retirement Plan?

Yes, the IRS actually places very few limits on what you may buy with your IRA retirement funds. It is your IRA custodian who has put those limits on your retirement account. Truly self-directed IRAs allow you, the investor, to choose your investments.

Can I borrow funds to buy real estate in my IRA? Can my IRA get a mortgage?

IRAs can invest in all types of real estate!

Yes, many banks have discovered the demand by IRA owners to finance real estate purchases in their IRAs. Banks continue to develop products specifically for IRAs and other plans. You’ll need a non-recourse loan, which tend to have higher down payment requirements than those for personal homes, but these loan types are available at many banks.

Do I need an LLC to purchase real estate with my IRA?

An LLC may be used to purchase real estate, but it is not required. Your IRA can purchase a property in the very same way as you would personally. This is the most common way real estate is purchased and in this situation the property is simply titled to your IRA.
 
Do I need to use a special broker and title company?

No special broker or title company are required—you can use the same ones you used to buy your current home or any other broker. However, using a broker that is familiar with this process may be helpful buy it is not required.
 
Can I repair the property myself?

You may not personally do any work on the property and neither can any other disqualified persons (IRA holder, his spouse, his parents and grandparents, children and grandchildren, their spouses, certain fiduciaries and any entity owned or operated by a disqualified person. Work can be done by anyone else and you still have control over what you want them to do. For instance, you can’t personally paint the walls but you can tell the painter how you want the house painted.
 
Can I partner my IRA with my personal funds? Who else can I partner with?

If you cannot afford the investment property you are interested in you have many options. One option is to partner with yourself. For example your IRA can own 50% and you can personally own 50% (note: even if you personally own 99% of the property you are still prohibited from living in it or using the property.) You may also partner with someone else’s personal or IRA funds; the disqualified persons rule does not apply here so you may partner with your spouse, parent, child, friend, or whomever. There is no limit to how many people you can partner with. The percent of ownership cannot be changed once the investment is made.
 
Do I have to pay capital gains taxes if I sell the property?

Because the property is owned within a tax deferred (Traditional IRA) or tax free (ROTH IRA) plan no capital gains taxes need to be paid.

Can I take property as a distribution and then live in it?

Yes, after you reach 59.5 years of age you may choose to take the property as a distribution from your IRA. Once the property is 100 percent in your possession, you are free to use the property as you wish.

Living in your IRA-owned real estate

“I have an IRA invested in Real Estate. Now how do I take that real estate to live in, when I’m retired?”

Hopefully, that rental property has served your retirement plan well, not only appreciating in value over time, but also providing regular monthly cash flows over a number of years.

But what if you’ve decided you really want to retire and live in that house?

If the house was purchased by your Roth IRA, and you’ve held the Roth IRA for 5 years and turned 59 ½, it’s yours to distribute to yourself, with no tax or penalties.

But what are your options if your real estate assets were held in a Traditional account?

Certainly, you can distribute the house once you’re 59 ½, without paying any premature withdrawal penalties. But you’ll have to pay taxes on the dollar amount (in this case, property value) of your withdrawal, as though that amount was some cash added to your income in the year you take it. Naturally, since we’re talking about thousands of dollars, this may be costly. However, you have a few options:

1) You can distribute your IRA’s holdings a little bit at a time.

For example, at age 59 ½, you could begin distributing 10% of the property from your IRA each year. If you distributed 10% in year one of such a program, this would result in the property being owned 90% by your IRA and now 10% share is owned by you. You’ll need to arrange with the title company so that the ownership share is properly reflected accordingly each year. You’ll still be constrained from using the property personally until it is entirely distributed from the IRA. This will allow you to spread the tax burden from distributions over a 10-year period.

Keep in mind, this will change your monthly cash flows. You will personally be entitled to a direct 10% of income and responsible for 10% of expenses. These proportions would need to be honored since there are now two investors: you and your IRA.

2) You could consider converting a portion of your IRA (including that real estate asset) to a Roth IRA.

Yes, you’ll pay income tax on the amount you convert, but this may make sense for you, if you anticipate a number of years more of income to sock away, and for your IRA’s value to grow, before reaching age 59 ½. The point here is you may be paying some tax now on a smaller amount, instead of paying tax on a potentially larger amount down the road at retirement.

You could also convert a fractional share from your IRA to a Roth IRA each year so that at some point in the future your Roth IRA owns the entire property. Then, if you’ve reached age 59 ½ with 5 years in that Roth IRA, it’s available to withdraw free from penalty or tax.

3) You may elect to begin distributing shares of your property before retirement age by using the 72T method.

The IRS grants the 72T method (substantially equal payments) as an exception, which enables one to avoid the penalty for early IRA withdrawals.

The 72T exception offers a choice of methods, which you can use to tailor the timeline of your distributions. All are based on your life expectancy (or, if you elect, on the joint life expectancy of you and your beneficiary), and whichever method you choose must be continued for at least 5 years or until reaching age 59 1/2.

How to help a cousin buy a home with your Real Estate IRA

One of our New Direction IRA client representatives recently spoke with a prospective client who asked us to frame some ways for his IRA to help a cousin buy a home. The cousin has a good job, but he wasn’t sure about his credit rating nor did he have the money for a down payment. We spent some time talking about the ways that IRAs can participate in real estate and the IRS rules associated with that participation. Below is an excerpt that was sent to the cousin to get the ball rolling. If you are in a similar situation, perhaps this may help you get your thoughts together.

Scenario 1 – My IRA buys the house (the property would literally be deeded to the IRA). It secures a non-recourse loan to do this. Typically, a lender will want 30-40% down. So our max purchase price would be about $150K I am guessing. You would pay rent to the IRA or we can set up a rent-to-own agreement. This set-up, depending on the purchase price might leave me with little cash; so, you may need to pay for any unexpected repairs, which of course, would come off the rent or be recognized in some way. The advantages to this method is that you would not have any initial cost and would not have to qualify for financing. And, you could buy my IRA out whenever it was feasible for you.

Scenario 2 – We buy the house as tenants-in-common. My IRA and you are the deed holders, each owning a percentage of the house. This can be kind of fluid but the basic idea might be that I put in the ~$50K, and you come up with the rest. If you need financing for your part, the collateral for the loan would have to be something other than the house. It would also be helpful for you to let me know what your exit strategy might be. In this set-up, I really just contribute the IRA money in exchange for a percentage ownership in the house, but from that point, pretty much all the financial burden would fall on you.

Scenario 3 – I can simply loan you the money that I have available and we can set up the rate, term, and such in a way that is financially possible for you. Like interest only for several years, with a balloon payment down the road or some such. This set-up would mean that you are the deed holder, and the financing would be whatever you can work out.

Because you are a non-disqualified person to my IRA, we have a good deal of flexibility in how we set this up. In part, it will come down to how you want to play it and what your financial options are. One thing that I will mention is that my IRA’s participation always needs to be titled as the IRA. The important thing is to not put just my name on an offer or any type of legal document.

As a point of clarification, disqualified persons to an IRA include the IRA holder, their spouse, and lineal ascendants and descendants (and their spouses). However, the sides of the family tree, siblings, aunts and uncles, cousins, etc. are not disqualified persons.

How to partner with your IRA to buy Real Estate

Q - It is possible, supposedly, to "partner with your IRA". You put in, say, half the money and the IRA puts in the other half. The partnership does a fix and flip. The net profits would then be split 50/50.
Is this true? I thought you could only do this if you start the business with the IRA as a partner. But if your business already exists, you cannot use funds from your IRA for a flip. Is that not right?

U.S. Department of Labor ruling 2000-10 allows you to partner with your IRA but there are special circumstances under which it is allowed. Otherwise it's self-dealing and a prohibited transaction. Here are the basics for partnering with your IRA.

Your IRA can partner with another person, entity or IRA. In partnering, as you may know, the IRA would own only a percentage of the property and the remaining portion would be owned by someone else. You may partner your IRA with personal funds and/or disqualified persons, but some restrictions apply.

One major restriction is when your IRA partners with disqualified persons, the ownership percentage must be kept constant throughout the life of the investment, and all expenses and income must be split according to that ratio. Each bill must be paid according to the ownership ratio. 

For instance, if you and your IRA each pay half of the cost for a real estate investment, any renovation or fix-up costs must also be split in half. Conversely, any income from the property must also be split in half.

Although these restrictions require an active investor to properly manage the investment, a good self-directed IRA provider can smooth the edges and make your investment and management process easier. Partnering with your IRA has worked for some of our clients and can be a valuable tool to increase retirement funds and acquire lucrative real estate assets.

And, contrary to popular belief, you don’t need to start an LLC when partnering with your IRA to purchase real estate. You can also partner with non-disqualified persons to your IRA such as your siblings or cousins to set up a more flexible investment plan.