Did you know the IRS allows you to direct how your IRS funds are invested? And in fact, you can direct your IRA monies to purchase investment real estate. With the help of Uncle Sam, your IRA funds can work for you under your direction and bring great tax-deferred financial returns.
Designating the right IRA account
Most IRAs are set up through a custodian or financial firm who manages the assets through stocks, bonds, and primarily mutual funds. With a little research, you can find a custodian who allows you to transfer all or part of your IRA funds into a traditional IRA, a Roth IRA, or a Simplified Employee Pension Fund (SEP-IRA), which allows you to direct the custodian in the real estate investments you wish to make. These types of IRAs are called "Real Estate IRAs" or "Self-Directed IRAs." You would be wise to select an IRA custodian who is knowledgeable in the real estate investments you wish to make.
If you are knowledgeable and educated about real estate investments, or know someone who is and you want to invest with them, then this type of IRA may be for you. Once you have funds set up in a self directed IRA, you may then direct the custodian how the assets are to be invested. The IRS allows IRA funds to purchase raw land, residential houses, commercial property, or even mortgage notes or Real Estate Investment Trusts (REIT). Remember, you must research and direct how the funds will be invested. The custodian does not conduct the research nor make recommendations for you.
Profitable example of IRA-funded real estate investments
Here's an example of how a self-directed IRA could work for you. Say you transfer $100,000 into a real estate IRA. You find a distressed single family home and pay $75,000 to purchase the home, knowing the full market value after repairs will be around $125,000. You may spend an additional $20,000 for renovation and repair costs, which come directly from your real estate IRA account. You manage to sell the home for $120,000 and put the $25,000 profit back into your real estate IRA fund, leaving your profits tax-deferred.
Downsides to purchasing real estate investment property with IRA funds
Unfortunately, the IRS has strict rules that govern your ability to make use of any property purchased with IRA funds. You may not use a residential property for your own private dwelling or vacation home. Nor can you use a commercial building space as an office for your business. However, once you reach the age of distribution, usually 59-1/2 years old, you may then use IRA real estate as a primary or secondary home.
All real estate assets must be held in the IRA custodian's name. The purchase of residential or commercial real estate property also allows no tax deduction benefit from mortgage interest or property taxes. Depreciation is also not allowed as an expense.
When purchasing investment real estate, you must also have extra funds set aside for the payment of property taxes and other maintenance costs.
Real estate may be the best way for you to grow your retirement funds. If you know how to successfully manage real estate property, you can make it interesting and profitable by using your IRA.