Can my IRA own real estate?

Posted by  on Mar 21, 2012

With today's low home prices and the best mortgage rates in decades, I'd like to buy some investment property for my IRA account. How do I accomplish this? Will mortgage lenders finance investment property held in an IRA?

You can hold real estate in retirement accounts

You can buy real estate for your IRA (or even a single-participant 401-k), and the income and equity pile up tax-free. The account and property purchase must be set up exactly in accordance with IRS rules. Mistakes can be very costly, so smart investors enlist the help of a CPA or other professional before they go property shopping.

If, for example, you bought vacant land for $100,000, and in 5 years you sell it for $150,000, your $50,000 gain is tax-deferred (traditional IRA) or tax-free (Roth IRA). Here's what you have to do:

  • Transfer the money for your real estate purchase from your IRA to an independent custodian offering real estate investment options.
  • Sign a letter directing the custodian to buy the property.
  • Real estate income is deposited into the IRA and expenses are deducted from the account.

But avoid these costly errors

Choose real estate for your IRA for the right reasons--for example, to diversify your portfolio or take advantage of investment opportunities. Don't do it to get a tax-free vacation home (because it won't work!). Here's what you need to know:

  • You can't transfer property that you already own into an IRA. It must be purchased by the custodian.
  • You can't buy a vacation home for the IRA and then rent it out to yourself or family members.
  • You don't get a depreciation deduction.

What about the mortgage?

You can finance your investment property through a mortgage lender or other source. However, the bigger your mortgage, the less income you can shelter. For example, if you buy a rental house for $100,000 and get a $75,000 mortgage, you get hit with unrelated business income tax (UBIT). You'd be able to shelter only 25% of the property's income because 75% of it is financed. The remaining 75% of income and capital gain is subject to ordinary income tax rates.


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