Invest in real property using your IRA

Did you know you can use your IRA money to invest in real estate? It requires a special kind of IRA account called a 'Self-Directed IRA', held by a custodian able to manage transactions related to holding hard assets. In these accounts, you can invest in raw land, pre-construction contracts, rental homes, appartment and commercial buildings, trust deeds, tax liens, gold bullion and coins, fine art, etc.

There are strict rules, with horrendous penalties for contravening them. You are prohibited from self-dealing. You cannot buy from yourself, or rent to yourself or family members. For example, if you purchase a vacation rental, you cannot stay there. If you purchase a 4-plex, you cannot do repairs or contribute 'sweat equity'. Why not? Well, remember, there are limits to how much you can contribute to an IRA each year, and providing sweat equity is a form of contribution to your investment - at what point does it exceed the contribution limit? The benefit of staying in your own vacation home is a form of distribution from the IRA, subject to taxation and early distribution penalties. Instead, they have to be 'arms length' transactions. But if you understand these rules, and abide by them, you gain access to a popular type of investment.

You don't have to be able to buy the property outright using your IRA. You can partner with your iRA to purchase a property and even take out a mortgage. A number of investors can pool their IRA's to make a purchase. When you want to exit a real estate investment, you can make use of a 1031 exchange to switch to another property.

A lot of people feel comfortable holding real property, and right now foreclosures look attractive in markets like ours, where the correction has been large. If a mortgage is unavailable because of the credit crunch, but the investor has money in an IRA, this is a way to get the deal done, but only if you work with qualified professionals to avoid the pitfalls.

If you would like to explore this idea further, or for introductions to professional help, call (408) 725-7135 or click here.

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