A Guide to Self-Directed IRA Real Estate Investment

Developing a retirement strategy is a vital part of adulthood because you’ll want to live out your golden years in comfort. You will have multiple options as you create your plan depending on the risk level you’re comfortable with and how you wish to structure your taxes.

One potential option involves purchasing real estate using a self-directed IRA. This method puts you in total control of your IRA account while allowing you to buy real estate and other assets with the money you contribute.

Buying real estate in this manner offers various benefits, but there are some rules you’ll have to follow along the way. This guide explains everything you should know about self-directed IRA real estate investment.

What Is a Self-Directed IRA?

A self-directed IRA is a retirement account you can use as an investment vehicle. You can structure your account as a Roth IRA or traditional IRA, but unlike a managed account, you’re responsible for selecting and buying assets to grow. You’ll need a custodian or trustee to administer the account, but that individual isn’t permitted to offer advice or professional guidance.

Going with a self-directed IRA ensures you’ll have fewer limitations on what you can buy as investments. You won’t be limited to stocks and bonds, as you can invest in real estate and other assets you believe will appreciate. 

Benefits of IRA Real Estate Investments

Buying real estate with self-directed IRA accounts offers numerous benefits. Those who prefer real estate investment to the stock market might go in this direction if they have enough cash in their IRA to purchase a desirable property. Here are a few reasons self-directed IRA real estate investment can be beneficial:

Real Estate Typically Appreciates

No investment is a sure thing, but real estate often appreciates in value over its lifetime, leaving you with a valuable asset when you’re ready to retire. You can also boost your IRA through rental fees you collect, helping your account grow even further. You can then sell the property when you reach retirement age.

Potential for Tax-Free Growth

You’ll experience some tax savings on your real estate investment if you structure your self-directed IRA like a Roth IRA. All the appreciation your rental property experiences while your retirement account owns it will be tax-free in this scenario because you’ll have already paid tax on the money you contributed to the account. You could alternatively structure your account as a traditional IRA and receive a tax deduction on the contributions you use to buy the property.

Diversify Your Portfolio

Diversifying your portfolio can also offer protection from the stock market, making your investments less volatile. Real estate is typically a safe investment and acts as a hedge against inflation, so you don’t have to worry too much about your asset losing value. You can also diversify geographically because the property doesn’t necessarily have to be local.

Learning how self-directed IRA real estate investing can benefit you is crucial as you plan for retirement. This knowledge can assist as you make the best decisions for your future.

Five Real Estate Self-Directed IRA Rules You’ll Need to Follow

Self-directed IRA real estate sounds straightforward, but there are some regulations you’ll need to understand. These rules are in place to ensure your IRA remains a retirement account and that you don’t benefit directly from this arrangement before you reach retirement age. Some self-directed IRA rules real estate investment requires include the following:

1. You Can’t Use the Property

Any real estate you buy using a self-directed IRA is for investment purposes only. You aren’t permitted to live in the home or spend any time vacationing there because the property isn’t for personal use. You also can’t run a business from the property or allow any relatives to live there.

2. The IRA Must Pay for Everything

All maintenance and repair money must come from your IRA. You aren’t permitted to pay any of these expenses out of pocket, and if the IRA doesn’t have the cash to pay for maintenance, you’ll have to over-contribute and pay the penalties associated with that. Keep in mind that you’ll leave your rental income in the account to cover these expenses.

3. All Profit Goes Back to the IRA

Every penny the rental property makes must stay in the IRA account. You can reinvest this money or leave it in the account to cover expenses, but you aren’t allowed to withdraw any cash until you reach retirement age. A 10% early withdrawal tax applies to any money you remove from the account prematurely. 

4. Rules for Disqualified People

The IRS has a list of disqualified people who can’t live in or work at the property. This list includes your spouse, parents, grandparents, great-grandparents, children, their spouses, grandchildren, and great-grandchildren. You also can’t purchase the property from any of these people or it will be deemed a self-dealing transaction that could disqualify the entire account.

5. You Can’t Claim Deductions

It’s worth noting that you won’t receive any of the tax advantages that typically accompany owning property. You’ll likely pay cash for the property using funds from your IRA, so you can’t deduct your mortgage interest payments. The IRA account holder doesn’t technically own the property, so the benefits don’t arrive until you retire.

Following these real estate self-directed IRA rules can help you avoid numerous problems as your investment grows. Take the time to understand your responsibilities when using this investment vehicle to keep your retirement income safe.

Your Retirement Plan

Going with a self-directed IRA for real estate investment could be beneficial in many situations, but it isn’t the only option. The best way to develop a retirement strategy is to speak with a professional advisor to ensure you have all the information and make the right decision for your future.

Bogart Wealth offers retirement planning services in Northern Virginia and Houston, Texas. We’ll present you with options to help you reach your retirement goals and maximize your savings for your later years. Contact Bogart Wealth to speak with an expert about your retirement plan.

Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bogart Wealth, LLC [“Bogart Wealth”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level (s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Bogart Wealth. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Bogart Wealth is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bogart Wealth’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at bogartwealth.com

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