If you've been diligently making your IRA contributions over the years, you may have acquired enough funds to consider buying real estate as an investment option. Your IRA assets can be used to buy real estate so long as the property is purchased for investment purposes only---that is, the property cannot be used as your residence, a vacation home or a place to conduct your business. As a prerequisite for buying real estate, your IRA assets must be in a self-directed IRA in which you control the checkbook. Although you still use an administrator or custodian for your IRA assets, you decide how to invest the assets.
Step 1
Ask the current custodian of your IRA assets about its policy on administering self-directed IRAs and purchasing real estate using IRA assets. Not all custodians agree to do this. If your custodian doesn't provide this service, you'll have to find a custodian who can meet your needs and have your IRA assets transferred to that custodian.
Step 2
Locate a suitable investment property, such as a commercial or residential rental property, and negotiate the purchase with the seller. Notify the custodian of you IRA to find out whether it has any special forms or information you need for the transaction. When you reach the point where you will make a written offer, indicate that the purchaser will be your IRA custodian. For example, the purchaser would be identified as "IRA Trust Company, custodian of Jane Smythe IRA."
Step 3
Review the purchase agreement for the property that is prepared after your offer is accepted. If you need professional advice regarding the agreement, consult your attorney, accountant or Realtor, as the custodian of your IRA will not provide such services.
Step 4
Deliver the approved purchase agreement to your IRA custodian for signing and return the signed document to your Realtor or title company to prepare for closing. When the purchase is ready to close and the final documents have been prepared and approved, deliver them to your IRA custodian for signing.
Step 5
Instruct the title company to send all closing documents to your IRA custodian, and have the custodian record the real estate purchase in your IRA account.
Tips and Warnings
- The cost of a self-directed IRA varies, as some custodians charge a yearly fee based on a percentage of your assets while others may charge a flat fee depending on the type of assets. Inquire about these with several custodians before choosing one.
- Using your IRA to purchase real estate as an investment strategy has downsides. If you're not diligent in following the IRS rules for owning real estate in your IRA, you will incur significant tax penalties. The usual tax deductions associated with owning real estate, such as depreciation, aren't available when you're purchasing real estate with your IRA. Because all expenses must be paid through and held in your IRA, you generally need a high amount of liquidity in your IRA to meet all regular expenses, such as real estate taxes and property insurance, as well as repairs and maintenance.
Things You'll Need
- Self-directed IRA
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