Sure it is, providing you do not want to keep your assets liquid, do not want or need any personal use of the land or real estate, and do not mind the risk of not being able to sell the property to draw out your mandatory withdrawals when you reach age 70½. If that is true, then yes, real estate, including leveraged real estate, generally is a viable option and permitted in an individual retirement account if certain guidelines are met.
Now that you know my personal feelings about investing in real estate in an IRA, let’s go over the “dos and don’ts,” as well as a few important points to keep in mind:
You can use IRA funds to direct the purchase of raw land, commercial buildings, condos, residential properties, rental properties, vacant lots or acreage. The real estate must be solely an investment; the taxpayer or related parties cannot use the property in any way. The taxpayer should purchase the real estate so that a trust holds title to the real estate. The property must remain in the trust until distribution at retirement.
You cannot buy real estate with your basic IRA—you must open a “self-directed” IRA. You can transfer all or a portion of your funds from your existing IRA to your self-directed IRA.
You cannot manage the property. An independent trustee for your self-directed IRA can hire a third party to collect rents and maintain or improve the property. All rents or profits must be returned to the trustee.
The biggest drawback of the real estate IRA is that you cannot mortgage the real estate to make the purchase. Do you have the funds in your IRA to purchase real estate? Will you still be diversified if you purchase the real estate? Property can be held in conjunction with other owners, as long as the property reflects the appropriate portion owned by your account as an undivided interest. Now consider: How easy is that to divide up when you turn 70½?
Caution: The IRA should have some liquid funds to pay for expenses (taxes, insurance, etc.). Any expenses you have to pay will have to be contributed to the trust and be within the federal annual contributions guidelines. For example, if the property taxes due are $2,000 and your annual IRA contribution is limited to $5,500, then you are within the limits (assuming you meet the earned income limits). But if you do not meet the earned income limits or the real estate expenses exceed your contribution limits, you will be subject to tax penalties.
Real estate is not a liquid investment. If you are approaching retirement age, do you anticipate that you will need to draw upon your IRA? Will you need to sell your real estate? Is the timing right to sell? Are you going to be forced to sell before you are ready?
When you turn 70½, you can direct your IRA to turn your real estate over to you, but be sure to plan for the tax effect. When the asset is distributed at the current market value at that time, it is taxable to you.
The asset must be treated like any other investment. Be aware of potential prohibited transactions. Remember, this is a retirement account.
If you have the urge to invest in something besides stocks, bonds, and mutual funds, and your C.P.A. cannot talk you out of considering real estate, think about the consequences. The return on your investment may look better than what CDs are paying right now, but if you have never bought real estate except for your personal residence before now, you will want to do a lot of homework, especially if you want to invest using your retirement accounts. If you would like any further information regarding this issue as well as any other tax related issue, please contact Henssler Financial at 770-429-9166 or experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
