Avoid These Mistakes When Buying Real Estate with a Self-Directed IRA

Estimated reading time: 3 minutes(Last Updated On: August 31, 2012)

The self-directed IRA can be an extremely powerful tool for building up your retirement nest egg. With the proper custodian, you’ll be able to invest in assets that many IRA custodians choose not to allow. One of the most popular investments within a self-directed IRA is real estate.

But there are some aspects of buying and holding real estate within an IRA which make the implications of that type of investment significantly different from buying stocks or mutual funds. Individuals who haven’t properly planned ahead can find themselves facing significant financial penalties by virtue of their IRA investments in real estate.

If you want to avoid making this costly mistake, the specialists at Quest Trust Company can help you steer through all the information and help you to make a sound decision. They’ve been helping individuals like you make decisions about their self-directed IRA and invest for their future.

Here are some of the most common mistakes they can help you to avoid.

Not Having Enough Account Assets to Cover Real Estate Carrying Expenses. Holding real estate as an investment involves a number of different expenses. There are annual property taxes that must be paid, property insurance premiums to be paid, monthly assessments (if you hold a residential condominium or co-op), payments to the property manager, upkeep and repairs, as well as principal and interest payments if the property is subject to a mortgage.

Unless you have enough additional cash or liquid assets within your self-directed IRA to pay all of these expenses, you’ll need to rely on the cash flow that’s generated by the property. You might purchase a property expecting a certain level of cash flow, but what happens if you can’t find a tenant and the property sits vacant for a few months, or you have a significant unexpected expense related to the property? Unless you have enough additional cash in your account, you might have to make additional contributions to your account that could threaten its tax advantaged status, and potentially result in a taxable distribution, plus the possibility of additional penalties.

Personal Use of Real Estate Held by IRA. You are prohibited from any personal use or immediate benefit of any asset held by your IRA, including real estate. So while it’s legally permissible to buy a property now that you plan to eventually use as a retirement home, you cannot occupy or use that property before retirement, even for a single day or weekend. There can be no personal use of any real estate held by an IRA before you retire.

Not Taking Into Account Future Taxes. Once you retire, if you take possession of a piece of property held by your IRA, you may owe taxes on that distribution. If your self-directed IRA is set up as a Roth IRA, then you won’t owe anything (since you contributed after-tax dollars to the account, and distributions from a Roth IRA are tax free), but you may be hit with a sizable tax bill if your self-directed IRA is formed as a traditional IRA (rather than a Roth). Be sure to take any future tax liabilities into account when considering a real estate purchase within your self-directed IRA.

Provided that you understand all of the implications of holding real estate within a self-directed IRA, doing so may help you build a significant retirement nest egg, or even help you retire into your dream home. Contact Quest Trust Company today at 800-320-5950 for a free consultation and find out how you can avoid mistakes with your self-directed IRA that will affect your financial future.