Real Estate IRA Rules

Estimated reading time: 3 minutes(Last Updated On: August 13, 2019)

If you haven’t been too fond of how your IRA is doing with stocks or bonds, you’ll want to take a look into putting your IRA funds towards real estate. Any type of real estate can be purchased with an IRA. Although you can invest your IRA towards real estate, there are many rules you have to follow for how you can buy real estate with your IRA and how you can use your real estate. If you violate these rules, you will face serious consequences with your taxes.

Self-Directed IRA

IRS rules do not set a requirement for forcing real estate as an option towards investment, even though the rules of the IRS do allow IRA funds to be used towards a real estate investment. Most companies that offer traditional IRA investments will not allow an IRA owner to make an investment in real estate. This is because there is a burden on administration for the management of real estate investments. If you are in this position and want to invest IRA funds in real estate, you will be put into a position where you have to convert some or all of your traditional IRA funds to a self-directed IRA. A self-directed IRA is a type of IRA that allows you and you alone to make decisions on your investments. These can be created at banks that are non-depository.

Transactions that are prohibited

Based on the rules of the IRS, real estate that is owned by an IRA can only used for investment purposes. Because of this, several restrictions have been placed that change the way you can manage your real estate investment. One of the most important terms when trying to understand the restrictions is “disqualified persons”. This is talking about the person who owns the IRA and the people close to them. Disqualified persons would be advisers and someone in a business who has interest that is greater than 50 percent. Purchase from a person who is considered disqualified is against the IRS rules, and it prevents them from using any real estate that has been purchased with an IRA for self-gain.

Issues with financing

Using cash for your investment will allow a future payment for the property to stay in the IRA, which is tax deferred until distributions are ready to be taken out. However, if you get any sort of mortgage out of it, you will be required to pay taxes. You will won’t have a guarantee that you will get a portion of the mortgage back.

Tax Consequences

Violating the rules of the IRS regarding restricted transactions will allow the IRS to take the funds that you used in your IRAs distribution. You will be required to pay taxes on funds that are from the first year in which the payment has taken place, and you will also be charged interest. Additional penalties could be included, depending on the situation. It is best to follow the rules and always talk to an advisor before moving funds to avoid accidental penalty.

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