Real Estate Investments with a Self-Directed IRA Can Pay Off Handsomely

Estimated reading time: 3 minutes(Last Updated On: April 13, 2021)

Real estate is a popular investment option for those who have a self-directed IRA as one of their retirement savings tools. In fact, using a self-directed IRA with a custodian such as Quest Trust Company is virtually the only way to use tax-advantaged retirement funds to invest directly in real estate, and to do so in exactly the way you choose.

There are many different ways to invest in real estate with a self-directed IRA, and the most appropriate type of real estate investment for a particular individual is going to depend on their investment goals and their account balance, as well as various other factors. Regardless of the type of real estate investment you choose, here are some ways that choice can pay off handsomely.

Income to Acquire Other Investments. Many real estate investors choose properties that generate a significant level of current income. Single family rental homes, multi-unit apartment buildings and commercial properties are common examples of income-generating real estate investments.

When you invest in income-generating properties within your self-directed IRA, you create a flow of cash that you can use to purchase additional investments within your account. This is significant because you’re limited in how much you can directly contribute to a self-directed IRA ($6,000 for the 2021 tax year, or $7,000 for individuals age 50 or over). Having additional cash flow generated by real estate within your account means that you’ll have a greater number of new investment options to choose from.

Income During Retirement. If you’ve already entered retirement and are now taking distributions from your account, an income-generating real estate investment can provide all or part of the funds for those distributions.

In fact, some investors are able to build the real estate investments within their self-directed IRAs to the extent that they’re able to finance their retirement living expenses solely based on the income they receive from those investments. And such a scenario would allow the account holder to receive that income without having to to sell any of those properties. In fact, those properties may continue to appreciate in value over time, potentially leading to significant long-term capital gains whenever the account holder chooses to sell.

A Retirement Primary Home or Vacation Home. Finally, another way that real estate investing with a self-directed IRA can pay off handsomely is by the account holder investing in property that they will actually use themselves during retirement. This might be single-family home or condominium that they’ll use as their primary residence. Or it could be a property that they’ll use as a vacation home or part-time residence during retirement. It could even be a piece of undeveloped property that the account holder will use to build a home upon.

If you choose to use your self-directed IRA to purchase real estate, it’s important to fully understand the tax-implications of doing so. For example, taking a distribution of the property will trigger a significant tax liability if your account is set up as a traditional self-directed IRA, while no such such liability will accrue if your self-directed IRA is set up as a Roth account.

One thought on “Real Estate Investments with a Self-Directed IRA Can Pay Off Handsomely

  1. An aquaintance is divorcing, and needs to pay his spouse for the equity in their home as part of the settlement.
    Am I able to establish an account with you and offer him the sum needed for the settlement as a second mortgage as an investment from my IRA?

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