How To Buy Real Estate In Your IRA
As a financial advisor for over 30 years helping clients manage their retirement assets I’m often asked the question, “Can I buy real estate with my IRA?”. The short answer is, “Yes, if you have a self-directed IRA”. It’s actually not all that difficult. However, there are many rules and obstacles you must overcome before you’re able to do so.
First of all, “what is a self-directed IRA”? An IRA is simply an individual retirement account. It’s just like a 401k for people who don’t work for a company with a 401k. Every IRA account has to have a custodian, which is essentially the bank that holds or “custodies” the asset or assets.
Unfortunately, most IRA custodians restrict the investment options to traditional investments such as, stocks, bonds, and mutual funds. It’s not the law. A self-directed IRA is not restricted to just those assets and can hold traditional as well as non-traditional (real estate). It’s just easier for most investment firms and custodians not to hold real estate because every asset in an IRA must be valued at year end and real estate is not always easily valued because it is not publicly traded. To make sure everything is valued properly, we use a TPA, or third party administrator who acts as the plan’s accountant. Real estate is the most common non-traditional asset held by a self-directed IRA.
For the savvy investor, owning real estate within an IRA offers many benefits such as tax deferred growth. You can own real estate that generates cash flow, grow the value of the IRA, and all of the income is tax deferred. When and if it’s time to sell the property for a profit, there is no realized gain because the interest is owned by the IRA. That’s what you call a Triple Compounding IRA!
There are several restrictions and prohibited transactions outlined by ERISA, the rules that govern IRAs so be sure to use an expert. In addition, there is only one TPA in northern California that I know of and very few others investment advisors that will work with non-traditional assets within an IRA. Make sure you speak with a qualified professional who can help you properly structure your self-directed IRA.
For more information feel free to contact me (916) 925-8900