With a downturn in the stock market and interest rates paid on bank-held funds, investors usually seek better-paying options for investing their money. One way of creating a larger profit on investments, especially during a housing low, is to establish an IRA account that allows you to invest in real estate using tax-free IRA funds and earnings. You should carefully research IRA custodians and their individual requirements/limitations on real estate investing before establishing an IRA account for real estate investment purposes.
Step 1
Make a list of reputable IRA custodians that specialize in real estate investment IRAs, also referred to as self-directed IRAs.
Step 2
Ask each custodian for a list of fees associated with the real estate purchase and continued ownership and what services the custodian provides. For example, some custodians may collect rent on investment real estate while others require that collection and other real estate servicing issues, such as property maintenance, be handled by a third-party provider or property management company.
Step 3
Ask each custodian what type of property you are allowed to purchase with your IRA funds. Most IRA custodians allow for purchases of domestic land, residential properties and commercial properties, but may have limits concerning foreign property purchases.
Step 4
Choose the custodian that best suits your needs and establish and fund the IRA account.
Step 5
Select the property you wish to purchase and make the details available to your IRA custodian so that the custodian can facilitate the purchase. You need enough funds in your IRA account to make the purchase and continue funding the IRA to cover the ongoing costs of property ownership, such as tax and insurance, that aren't covered by monthly rental fees. Make sure any shortfalls for operating the property do not exceed your annual contribution limitations, or you will be forced to sell the property, possibly incurring penalties for early withdrawal on the IRA account.
Tips and Warnings
- When you reach penalty-free retirement age for the IRA, you can convert IRA-purchased real estate currently used for rental property to your primary residence or a second home. The value of the home is taxable at the time of conversion if you used a traditional IRA for the purchase. If you use a Roth IRA to make the real estate investment, the conversion is tax-free.
- You cannot live in or otherwise use the property purchased with the IRA for personal purposes until after you reach retirement age and convert the property from investment to personal use.
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