If the stock market experience involving your IRA funds has been a negative one, the stability usually found in a real estate investment will appear as an attractive alternative for your funds. However, even though investing your IRA funds in real estate is permissible, the rules are complex and you must convert to a self-directed IRA because a traditional IRA is not suitable for real estate investments. Also, the IRS does not require IRA custodians to offer real estate as an investment option, so you may have to transfer your IRA funds to a custodian that permits real estate investments.
Step 1
Convert your traditional IRA to a self-directed IRA, either with your existing or with a new IRA custodian. With a self-directed IRA, you decide what investments to make, such as owning real estate. If your custodian's policies prohibit real estate investments, you will have to transfer your IRA funds to a custodian that permits real estate investments.
Step 2
Transfer a qualified investment real estate, such as a commercial or residential rental property, to your self-directed IRA custodian. IRS rules prohibit the real estate being used as your primary home, vacation home or place of business. Whenever a real estate transaction occurs with your IRA funds, your IRA custodian should be named as the owner, such as "Self-Directed IRA Company, custodian of John Smith IRA." Your custodian will probably have forms available for your use to facilitate real estate investments.
Step 3
Contact your tax adviser and inform him of your IRA real estate investment. Depending on the details of the transaction, you may have to file either IRS Form 5498 and Form 990T, or both. These forms are necessary to report unrelated business income tax or unrelated debt financed income related to an IRA real estate transaction.
Tips and Warnings
- In order for your IRA real estate investment to be successful, you must have sufficient spare cash in your IRA to pay all real estate expenses, such as taxes, insurance, management fees and maintenance. This is because IRS rules require that all expenses for your real estate investment be paid from your IRA. Because there can be significant time lag with these transactions, you should discuss the process with your IRA custodian how to set up your new account as soon as possible.
- Just because you can own real estate in your IRA doesn't mean you should. The IRS rules for owning real estate in your IRA are complex and, if you run afoul of them, the consequences can include the disqualification of your IRA's tax-deferred status. If you're under age 59½, you will have to pay tax on its full value, as well as penalties. Consider a real estate investment trust if you want to invest in real estate with your IRA.
Things You'll Need
- Self-directed IRA
Member Comments
dylcurtis July 26
Good stuff, Joe. One additional important thing to consider centers around financing such a property. If you decide that IRA real estate makes sense for you, keep in mind that one of the many rules about holding property within your self-directed IRA is that any mortgage must be an asset-based, non-recourse loan.
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