Property investment, as the more experienced investors among us may know, can be included inside your IRA. It isn’t common, but it is definitely possible. What are the common reasons for investing in real estate within your IRA? One of these is tax deferrals which you can receive from investing within an IRA. Consider, for example, investing $90,000 in a piece of property. This can appreciate up to $450,000 in 20 years, and you won’t have to pay taxes on it. To find out what other options you have for a property investment inside your IRA, continue reading below.
How to Include a Property Investment Inside Your IRA
Property Investment Through Self-Directed IRAs
Things to Consider in A Property Investment Inside Your IRA
1. IRA and Self-Dealing
Using IRA funds to purchase real estate means you must adhere to certain guidelines. It is important to note that you can’t deduct property taxes, mortgage interest, or benefit from depreciation. IRA, in this case, may share ownership over the property. It would also be advisable to carefully note ‘self-dealing.’ This is a legal principle which prohibits you or your family from benefiting from the investment. Self-dealing covers acts between a private foundation and a disqualified person only.
2. IRA and Real Estate
There are several trustees which do not offer IRA funding for real estate. This is partly due to the heavy administrative load. However, it is not against the IRA law to invest in real estate, be it commercial property or residential property, using the IRA. It is still up to the trustees to include or exclude real estate as part of the options they offer.
Choosing the Right Real Estate Investment
Experts providing property investment advice recommend choosing a business property as an eligible asset for a property investment inside your IRA. It should also be a new property purchase and not previously owned by you. The listed property doesn’t include a personal home, a rental property, or a second residential home.
1. Rental Properties
If, however, you would like to choose rental properties, you may also do this but through an IRA custodial account. You can then transfer funds from your IRA or 401(k) account to the IRA account name. However, there are specific rules in terms of handling and funding the investment under the IRA account name.
2. House Flipping
There is also an option for those who intend to purchase real estate, like single-family homes, for house flipping and not as a long-term investment. The only consideration is its limit allowed per year. But the taxes for earnings made are also tax-free or tax-deferred.
There are considerations such as required minimum distributions and arranging limited-liability companies, but there are also challenges involved.
1. Possibilities of Fraud
In recent years, federal and state regulators have noted an increase in fraudulent investment schemes which utilize a self-directed IRA as a key feature. Bernie Madoff, for one, was able to fleece quite a few independent managers and the self-directed IRAs in their custody. While investors can sue their account managers, it’s worth noting that most contracts don’t hold them liable to cover losses.
2. Mortgage Loan Inside the IRA
The traditional mortgage loan is not available through an IRA. This means you have to have more funds available inside your IRA to invest in property. It is most applicable when the investment is a long-term rental property. Also, become aware of other IRA administering fees and rules. It is very important to comply with the rules set by the IRA. This will prevent any possibility of losing your IRA and incurring extra taxes.
3. Allocating Assets
Experts advise diversifying your investment portfolio inside your IRA. This will protect your investments from any potential loss due to the market’s volatility. For new investors, seek advice from your financial advisor is a wise decision. They can provide an assessment based on your age and tolerance when it comes to taking risks.
The appeal of a tax-free retirement investment is leading many new investors into self-directed IRAs. Using IRA funds for a property investment opportunity requires one to fully understand the varying rules and conduct due diligence to mitigate risk investment. However, it can be an incredibly lucrative experience once all key components are taken into account. This can result in a higher yield on your property investment’s potential ROI given the right investment strategies.
What other recommendations do you have when choosing a property investment inside your IRA? Please share your suggestions in the comments section below.