How to Hold Actual Real Estate in an IRA

Daniel Penzing
Written by
Last update:

Step 1: Determine if Real Estate Investing Is Right for Your IRA Funds

Many people are familiar with retirement accounts such as 401Ks and IRAs, but fewer people know that they can hold a personal residence in an IRA. But it’s not as simple as picking up the house keys and moving them into your IRA account…

The first thing you have to ask yourself is if it is right for you.

If you are 18 or over, then it is eligible. It can be held for any period of time … it can not be sold for any less than the value and there is a 25% penalty for distributions prior to the age of 59.5.

Consider How You'll Structure Your SDIRA

In the past, IRAs were strictly thought of as a product for retirement purposes. However, the definition of the types of investments that can be held in an IRA has changed, opening up the world of real estate as a potential investment option. In order to hold real estate in an IRA, it must be placed in a self-directed IRA. In general, unless the investor has a background in real estate, it can be intimidating to start to self-direct their IRA.

There are a few things an investor can do to not only find the right self-directed IRA custodian for their needs but also understand the concept of self-directed IRAs and how they actually work. By speaking with a self-directed IRA custodian like Equity Trust Company, you can encounter self directed IRA custodian professionals that can help outline the best practices for holding real estate in an IRA and help you invest wisely in your future and your retirement.

What are the minimum investment amounts for self directed IRAs?

Step 2: Make Sure You Know What You're Getting Into

Because real estate can be a rewarding and lucrative investment, there are plenty of opportunities around for those who are looking to invest. Whether you're looking to buy a property to live in or to buy a property to open a business, the purchasing process can be long and grueling unless you have a lot of luck. If you've decided to purchase a property in an IRA, you need to know that, even if it was successfully done once, doesn't mean it will be again.

Liquidity is one area where properties purchased in an IRA don’t fall short. For example, if you bought a property and wanted it to be liquid, you would have to wait until you were 55-1/2 to sell. On the flip side, if you owned it in an IRA and wanted to sell it, you could sell it anytime you wanted, as long as your account balance allows it.

The main point is, real estate purchased in an IRA is not required to be held for a certain period of time, as long as you follow the rules.

In the end, any assets that are held in an IRA must be closely scrutinized and scrutinized, and the main reason is that it traps assets in an account that is not extremely liquid.

Are You the Ideal SDIRA Holder?

Secured real estate typically isn’t a smart choice for an IRA. Instead, buying actual real estate to hold in your IRA is primarily best for those who are hands-on. It’s important to realize that if you buy real estate in your IRA, you’ll have to handle the maintenance, management, and other details on a regular basis. If you’re self-employed, someone close to you is self-employed, or you just have a lot of time on your hands, this will be an ideal long-term investment choice.

Many investors, especially those just getting started, are looking for a steady income stream. This is where single-family real estate can fit in nicely. The IRS allows you to sell one home per year and reinvest the money without penalty. So with this structure, you can swap homes every year, meaning you get a steady income stream from the rent while also avoiding any long-term capital gains tax.

Secured real estate can be a smart choice for an IRA when making the following financial decisions:

Allocating capital to a long-term project such as nursing home for aging parents.

When pursuing self-employment that would make the IRA a tax-deductible retirement or business expense.

Buying a house for a family member.

Special Rules for SDIRA Investing

The rules regarding IRA investing are extensive. It’s considered a retirement plan prohibited from receiving any new contributions once the owner is over 70 1/2. Additionally, most investment houses don’t want anything to do with IRAs. So, where are all of the rules and regulations going to leave a budding investor?

Fortunately, there is a way to hold actual real estate in an IRA. It’s called the Self-Directed IRA. And it can open up a whole new market of real estate investments to those who might otherwise be limited to specific investments.

What are the benefits of a Self-Directed IRA?

First, the Self-Directed IRA is a traditional IRA which means that you can take out contributions at any time. Whenever your current investment matures, you can take money out of it (within certain limits, of course).

Step 3: Choose a Custodian and Set Up an Account

SDIRA Custodian Fees

When it comes to investing in real estate, many people don’t know that you can hold actual investment properties in an Individual Retirement Account (IRA). An IRA, or Individual Retirement Account, is a tax-advantaged retirement savings account available to those who qualify.

In order to set up an IRA, you must follow specific guidelines laid out by the IRS. One of the most important recommendations is that your IRA must have a custodian (or trustee) in control of the account. The custodian of your IRA is solely responsible for holding the financial assets in the account and carrying out any financial transactions made by the account.

In order for your IRA to be considered a Self-Directed IRA, it must follow a specific process to acquire any financial assets. It does this by buying any investments that are authorized by the IRS. These investments include real estate, gold, silver, and more.

When it comes to Self-Directed IRAs, it is recommended that the assets be placed under the control of a third-party IRA custodian. There are many custodians who operate under the Self-Directed IRA umbrella.

Today we will go over the top five custodians under the IRA self-directed exchange guidelines.

Dawson Street

Step 4: Transfer Your IRA Funds to Your SDIRA Account and Follow the IRS Rules

This is the most important step in the entire process. When you transfer IRA funds to the SDIRA account, the money will be considered a distribution and the income tax will be withheld.

If you later opt to return your IRA funds back to your full control, you will be taxed on the money that has accumulated since the transfer, plus the taxes that were withheld. In a regular IRA, the tax is treated as an ordinary income tax. In a Roth IRA, the tax is treated as a distribution.

The 7 Step Chapter Summary…

{1}. Establish an IRA with a third-party custodian, like Fidelity, TD Ameritrade, or another financial institution.
{2}. Open and fund a Self-Directed IRA LLC.
{3}. Fund the Self-Directed IRA with the IRA funds from the custodian.
{4}. Transfer the IRA funds to the SDIRA account.
{5}. Transfer the SDIRA funds to the IRA LLC.
{6}. Purchase real estate and real estate notes and notes secured by real estate.
{7}. Earn Money.

Until you get started, consider investing in real estate with these great options:

There are so many different benefits of investing in real estate related investments during your retirement. You can reap the benefits, even if you are a first time investor and no other investment option has piqued your interest.

One of the best things about investing in real estate through a self directed IRA is the potential to diversify your investment portfolio. This is a great factor to have if you are looking for more safety in your retirement funds.

Even real estate, which is considered a stable investment, has the potential to fluctuate in terms of fluctuations in the prices of the different properties that you are investing in. By using a self directed account, it is possible to choose a wide range of different types of properties. It can really help to diversify your retirement investment portfolio.

It is also possible to benefit from a tax exemption at the time of investment. If you are making a contribution to your self directed IRA, you will be exempt from paying taxes during that time, and you will even be exempt from paying taxes later on when you receive the benefits.

Comparing Opportunities

One of the biggest things to look for when comparing different types of self directed real estate investments is the potential for profit. It is possible to compare different types of real estate that you are considering by looking at the risks, returns, and profitability.