The Great IRA Real Estate Trap - Janguard (2024)

FAQs

What are the pitfalls of owning real estate in an IRA? ›

You cannot pay them yourself, which means you'll need to have plenty of cash in your account. And any income generated by your investment property cannot be paid to you – it must be paid directly to your IRA. Another restriction on property held in an IRA is that you are not allowed to do any improvements yourself.

With a self-directed IRA you can use retirement funds to invest in real estate in a tax-advantaged manner.

Can I use a traditional IRA or Roth IRA to buy a house? You can, yes. But it must be your first home (or your first primary residence in at least two years), there is a $10,000 lifetime limit, and there may be penalties for withdrawing early.

What Does a Self-Directed IRA Cost? Most SDIRA custodians charge three sets of fees: A setup fee, an annual administrative fee, and a transaction fee. For the custodians in our review, the setup fee ranges from $0 to $360.

Real estate has historically appreciated over time, ideal for an IRA's long-term investment horizon. Real estate can provide a steady income stream from rents, and any rental income you collect grows tax-free within the IRA. You can buy, sell, flip, and accumulate properties.

Your IRA is subject to estate tax when you die and your beneficiaries will have to pay income tax as the assets are distributed from the IRA. But there is also an offsetting deduction for the estate tax that the beneficiaries can take on their personal returns.

Complex Tax Rules – Investing through a self-directed IRA requires you to follow complex IRS tax rules that do not apply to other IRAs. Failure to follow these rules may result in unintended tax consequences such as extra taxes, financial penalties or even loss of the account's tax deferred status.

One of the most common prohibited transactions is known as self- dealing, which is when the IRA owner attempts to do business with themselves. This isn't allowed. You can't buy or sell property to yourself, you can't lend money to you from the IRA, and you can't pay any IRA expenses or take any IRA income personally.

Property Title

Real estate that is held in a self-directed IRA is owned by the account, not by you personally. That means the title documents that confirm ownership of the property are in the name of your IRA, rather than in your name. A typical title would read something like “[Custodian name] FBO [your name] IRA.”

You can withdraw up to $10,000 to buy or build your first home without a 10% tax penalty. The distribution may still be subject to regular income tax.

Who is a disqualified person for a self-directed IRA? ›

Prohibited transactions in an IRA

Disqualified persons include the IRA owner's fiduciary and members of his or her family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).

You need to open a self-directed IRA to purchase real estate assets with your retirement savings. If you have an existing IRA at another custodian like Fidelity or Schwab, you can transfer it to the self-directed IRA. Your self-directed IRA custodian makes the purchase with your savings.

Yes, self-directed IRAs can get audited. The IRS has specific reporting requirements for self-directed IRAs, particularly concerning hard-to-value assets. Since 2015, self-directed IRA custodians are required to report the types of hard-to-value assets held in these accounts using Form 5498.

The use of an LLC is not required when creating and using a Self-Directed IRA but the advantages should definitely be considered when determining the best type of account structure for your individual needs.

Investing in real estate can be a great way to build wealth, diversify your portfolio, and hedge against the stock market. You can buy a house with your Self-Directed IRA, rent it out to a non-disqualified person, and then, when you're ready to retire, the home can be all yours once it's distributed.

This doesn't mean using your IRA to buy a home is a good idea, though. By withdrawing money from your IRA you will lose out on years of compound interest, and the contribution limits for IRAs make it difficult to rebuild these accounts.

It's true: you can buy real estate with an IRA and some other retirement funds, which can be a great way to accelerate the growth of your nest egg. There are strict rules to buying and owning real estate in an IRA, and you must follow them carefully.

Spouse Beneficiary

A spouse who inherits can choose to become the account holder of the Roth IRA without any changes; this is called a spousal transfer. That is, no taxes should be owed on withdrawals from the account, and no minimum distributions are required.

If you choose your estate to be the beneficiary of your IRA it simply means that your IRA funds will go through your estate before your heirs see the money. The money becomes part of your will or potentially part of a probate court process.