First and Foremost: A retirement account (traditional IRA, Roth IRA, Simple IRA, SEP, KOEGH, 401K, Etc.) is simply a special account that holds your investments. Retirement accounts can own real estate. This article is designed to be a launching pad for readers to begin their exploration of real estate IRAs. Be sure to talk with your competent advisors before you take any action. Second, establish a self-directed retirement account with a company custodian that specializes in real estate IRAs. This is a relatively easy process and can be done by either establishing a new account or rolling over the assets of an existing account. Be sure there are no surrender charges for rolling over an existing account.
Some Things You Can Do
- Your real estate IRA can buy and sell many types of real estate including raw land, rental properties, condos, fixer uppers and commercial properties. Remember, it?s a self-directed real estate IRA that owns the property, not you personally. You don?t withdraw the money from the IRA to buy the property ? the custodian buys the property in the name of your self-directed real estate IRA.
- The property can be rented, but the rental income is paid into your IRA, not to you.
- All the expenses of renting and operating the property must flow in and out of your self-directed real estate IRA. Make sure your account has enough liquid funds to cover operating expenses and improvements.
- If you finance the property, it must be ?non-recourse financing.? That means the property, not the IRA account, is the sole security for the loan. Most traditional lenders won?t provide non-recourse financing. However, seller financing or private loans are possibilities.
- Your real estate IRA can buy a partial interest in a property. This is useful if your IRA does not have enough money to buy 100 percent of the property. It could be a partner and own a fractional interest.
Some Things You Cannot Do
- Your real estate IRA cannot buy a property that you, your spouse or certain family members already own. Your real estate IRA cannot sell a property to any of the above, nor can any of you have personal use of the property.
- Your IRA cannot lease the property to your business, nor can your business occupy any part of the property.
Is a Real Estate IRA Right for You?
Good real estate purchases are raw land, fixer-uppers and non-leveraged rental properties. The profit from these investments would be taxed if you owned the property personally. However, if your real estate IRA buys owns and sells the property, the profit would compound in your IRA tax-deferred (or tax-free if it?s a Roth IRA)! Remember, there is a limit on how much you can contribute each year to your retirement account. But there is no limit on how much the account can earn!
Last But Not Least
Before your IRA buys any property, you have got to understand how real estate works. There is a lot to it. Use a Realtor who has knowledge in rental properties, buying and selling fixer-uppers. Candace owns 8 rental properties and has flipped at least 9 homes in the last 2 years, and ALL have made a profit.