When you think of individual retirement account investments, you have in mind only stocks, bonds and mutual funds. However, you are allowed to make other types of investments as well, including real estate. You must have a self-directed IRA to buy real estate. Most people find that it's also wise to create a limited liability company for investing in real property.
Step 1
Open a self-directed IRA. The IRS requires that you select a custodian for a self-directed IRA. Banks and most other financial institutions will act as custodian if you open the account with them. Make sure the account provider allows real estate investments using self-directed IRAs.
Step 2
Learn the IRS rules regarding allowed and prohibited investments, as well as the proper procedures for buying and selling securities, properties and other investments. Unlike the trustee of a managed IRA, the custodian of a self-directed IRA deals only with administrative tasks. You take responsibility for compliance with IRS rules.
Step 3
Add money through contributions or rollovers until you have sufficient funds in the IRA to make realistic property investments. If you don't already have a retirement plan with funds you can move into your new IRA, this may take time. You may contribute $5,000 per year, or $6,000 if you're over 50.
Step 4
Set up a limited liability company, or LLC. You can buy real estate directly with your IRA funds. You'll use your IRA funds to invest in the LLC, which in turn is the legal owner of the properties you buy. This allows you to leverage investments by borrowing (taking out mortgages, for example). LLCs are administered by the states, so rules for creating them vary. Check with the appropriate agency in your state. Usually this is the state Department of Commerce or State.
Step 5
Retain the services of a tax attorney and a financial adviser who are familiar with IRAs and real estate investment. They can help you comply with all IRS rules and assist you in selecting good investment properties.
Step 6
Transfer the title of each property to the LLC. If you choose to purchase properties directly with your IRA, consult your custodian for the proper procedure for placing the property directly into the IRA.
Tips and Warnings
- You may liquidate real estate investments from your IRA, but you may not sell any such property to a family member. The IRS is strict about not making any personal use of IRA investment properties. In addition, you may not add any personal elements to the property. For example, you may not use personal funds to make repairs or improvements.
Things You'll Need
- Self-directed IRA
- Custodian
- Financial adviser
- LLC
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