Lots of people want to invest in rental real estate property in their individual retirement account (IRA), and it is possible and legal. However, in this video, “Big Al” Clopine, CPA offers six points you might want to consider before buying real estate in your IRA.
Real estate in your IRA. I like real estate, I like IRAs, but I don’t really like those together, and I’ll tell you why. Now, first of all, you can do it. It is an allowable investment. You can buy real estate in an IRA. So you have to set up a self-directed IRA. You can’t go to a typical custodian like Schwab or T.D. Ameritrade. You have to go to a special custodian that will hold real estate. So you can do it, but I’m not really a fan of it, even though I like real estate investing. The reason I’m not a fan of it – there’s a bunch, that’s why I brought my little cheat sheet here.
So the first one is you can’t have a mortgage in an IRA, and typically with real estate having a mortgage is what allows you a greater rate of return because you’re using other people’s money, it’s not just your own money. So that’s one thing.
The second one is, you cannot work on the property yourself. So if there’s something that needs to be fixed, you can’t fix it. Now how will the IRS catch it? Well, they won’t. I’m just giving you what the rules are. So you’re not allowed to fix that yourself. You have to hire a handyman.
There are no tax benefits per se because when you own a piece of property outside of a retirement account you get to take depreciation deductions – sometimes you create a loss. Sometimes you get to write off that loss against other income. You can buy and sell properties using a 1031 exchange on a rental property. And then when you pass away, if you own it outside of your property, your heirs get a step-up in basis. So it means when they sell the property, they don’t have to honestly pay any tax on it. None of that happens inside of an IRA.
You must pay all your property taxes in the IRA. So in other words, like, let’s say you need a new roof and it’s going to cost you $10,000 bucks and you don’t have $10,000 bucks in the IRA – you’re not allowed to fix the roof. You have to have that inside the IRA. It makes it really tricky.
There’s no personal use allowed – personal use, so if it’s a vacation rental you can’t use it. You’re not allowed to use it. That’s not something that you can do.
And then finally, your required minimum distribution (RMD) at age 72. You still have to take it out of your real estate. And if there’s not enough money in that real estate account you’re in a bit of trouble. So for those reasons I don’t typically like owning real estate inside of an IRA. I will say, so for most people, that’s probably true. Now, if you’re really good at real estate flipping or buying land and selling it at a higher cost, whatever, maybe that might be good for you. For all the rest of us, including myself, I’m not recommending owning real estate in your IRA. For more information go to PureFinancial.com
For more useful information about individual retirement accounts, check out our comprehensive blog post, IRAs: Everything You Need to Know