You can invest your IRA assets in different ways. Should you invest a portion of those assets in real estate?
At first thought, putting real estate into an IRA may seem like an off-the-wall idea. It is one you might want to consider, but you must be aware of the rules.
The concept is not new, but it has been slow to gain acceptance. Less than 2 percent of IRA assets are held in real estate.
The 2007-09 bear market led some IRA owners to explore alternative investments. That was when the term “self-directed IRA” entered the investing lexicon.
As the stock market tumbled, a cottage industry of investment firms emerged, urging IRA owners to direct IRA assets out of equities and into real property, real estate notes, and real estate investment trusts (REITs).
Holding real estate in your IRA means looking at your IRA differently. To a lesser or greater degree, your IRA transforms from a dedicated retirement savings vehicle to a real estate investment vehicle.
If you are more knowledgeable about the housing market than the stock market, you might prefer it this way.
Whether you know volumes about real estate or not, you must abide by the particular regulations and mechanics involved.
Self-dealing is outlawed. Legally, you can buy any form of real estate with your IRA assets, but you may not buy real property that will be used as your home or your place of business.
Your IRA (which is by definition a trust) may not purchase any real estate that you own, or any real estate that is owned by a business in which you or certain members of your family have an ownership interest.
It is also barred from selling any real property it holds to you or such business entities.
Proceeds from sale and rental income go right back into the IRA. This is necessary so that the account can retain its tax-deferred status. These newly invested assets get the same amount of creditor protection the IRA affords to other assets.
The level of protection varies by state, though, and IRA assets are not protected against civil lawsuits.
If you want to hold real estate in an IRA, speak with a tax or legal professional first. You must understand what you are getting into, as the full tax details are beyond the scope and length of this article.
Using your IRA to invest in real estate could be an auspicious move; it could also breed complications. Remember that an IRA is not a prerequisite for real estate investment.
Allen Freeman, CFP provides financial planning to retirees and widows. www.allen freemanfinancialplanner.com