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Buy Real Estate With Your IRA 129 Views :: 0 Comments :: :: Real Estate All your IRA money is in mutual funds and you'd like to diversify. One way is to buy raw land, a house or a building -- even your retirement home. On a vacation to the Texas Gulf Coast you spotted the retirement home of your dreams. Your problem is that you're at least a ten or more years from retirement and most of your money is in your IRA. Too bad, because by the time you're ready to sell your current home, that oceanfront beauty could be way out of reach. If only you could access some of that IRA money without paying a penalty; If only you could rent the place and sock away the income, tax-deferred; until you retire and enjoy it yourself. All your IRA money doesn't have to be in paper Most investors believe they cannot use IRA money to buy real estate. Developed or undeveloped - They are wrong. You can invest IRA money in a wide range of investments, including stocks, bonds, mutual funds, money market funds, saving certificates, U.S. Treasury securities, promissory notes secured by mortgages or deeds of trust, limited partnerships and real estate. That includes houses, condos, and beachfront lots. You cannot use IRA money to buy your own residence, or any other property in which you live. It has to be investment property. But when you retire, you can direct your IRA to turn it over to you as a distribution, at the current market value. Coastal Property in Texas John had accumulated net worth nearly $500,000 in his IRA. The money was invested in stocks and bonds. While on vacation he saw his dream retirement home on the Texas Coast, where oceanfront property was extremely undervalued and offered a high potential for growth. Find Your Dream Home Here It was a bargain price, too. The contract John signed required a $15,000 down payment; The balance of the purchase price was $250,000. The real estate IRA John quickly opened a new self-directed IRA, rolled over the entire amount of his old IRA into it, then directed his trustee to make the purchase with the IRA becoming owner. The closing took place, but that was only the beginning of John’s IRA advantage. Since the closing, the IRA has made wonderful capital improvements in the Texas property and rented it out for a nice income, all tax-deferred. (It could even have been tax-free if the Roth IRA had been in existence at the time). Now John is looking forward to his retirement, at which time the IRA will turn the property over to him as a distribution of the then market value. How come no one else knows the secret? IRA accounts invested in stocks, bonds and other financial paper are very lucrative for banks, mutual funds, insurance companies and brokerage houses. These institutions will act as your trustee and sell you their wares. But they won't act as your trustee if you want to buy real estate with IRA money. Why? They're not in the real estate business. So you're pretty much on your own investing in a real estate IRA. You have to find your own property, trustee and perhaps a management company to collect rents and maintain the property. Power to the people As a practical matter, you'll find very few professionals who can guide you through the entire process. Still, the do-it-yourself process is simple. Contact an independent trustee for a self-directed IRA. You must find an institution that will open a self-directed IRA and follow your "self-directed" instructions to the letter. It's not as hard as you may think. Try Sterling Trust in Waco, Texas. FAQ Here Sign broker-to-broker papers that will transfer designated portions of your existing IRA to your self-directed IRA. Find and buy the property using a real estate attorney to create the usual documents. Remember, you most likely will have to explain IRA ownership to him. The trustee will take title at your direction. The rules governing real estate IRAs are strict: The house or property must remain in the trust until distribution at retirement. It must be treated like any other investment. You cannot manage the property. But your trustee can hire a third party -- like Swede's Real Estate -- to collect rents and maintain or improve the property. All rental profits must be returned to the trustee You cannot mortgage your IRA The biggest drawback of the real estate IRA is that it may lack the funds to make a substantial purchase. At present, it is controversial as to whether your IRA can take a mortgage, or if this would violate several IRS provisions and render all of your IRA assets taxable. Our advice right now: Don't use IRA money as a down payment and take a mortgage for the balance due. You'll have trouble finding a lender who would go along with such an arrangement, anyway. Always contact your tax professional before making decisions. As the self-directed IRA becomes more popular, however, we hopefully will see clarification of the borrowing rules, and perhaps more lenders willing to make loans. Meanwhile, a special technique allows you to participate in real estate ownership through your IRA, even if there is not enough in capital to pay for the entire parcel. That technique consists of buying fractional shares of property through the use of a general or limited partnership. You can pool real estate IRAs for expensive properties In fact, a husband and wife can consolidate their IRAs to have more cash for a purchase, or leave them separate and form a partnership. Remember, you can always get out of your investment. Just direct your trustee to sell your property or interest, and have the funds reinvested elsewhere. Use the Roth and pay no tax at all later Or if you are over 59 , you may withdraw any portion of the proceeds of sale after they are deposited in the IRA. The receipts from the sale must be returned to your IRA account if you are to escape taxation and possible penalties. The Roth IRA is an ideal vehicle for those who are eligible. If the value of the real estate is expected to appreciate, it would be best to opt for a self-directed Roth IRA and pay the taxes over the next four years. In that way, so long as the real estate is not distributed for five years, it will incur no tax when the deed is transferred to you personally. Assuming you and your spouse eventually live in it before selling, $500,000 of profit is completely tax-exempt. It would be well worth your time and money to consult your real estate professional at Swede's and a tax professional to advise you on real estate investing through your IRA.