Mistakes Real Estate IRA Investors Make

Estimated reading time: 3 minutes(Last Updated On: November 20, 2023)

For investors who have the means, the time, and a custodian willing to handle one, real estate investments can be a great way to secure and grow funds for retirement. Most IRA accounts allow investors to choose from a variety of investments for where to place their retirement funds. Most choose to spread their wealth over a few options. Some are riskier with potential for a big pay-off, while others are safer with small growth potential. Real estate investments need a lot of time and attention afforded to them, so usually experienced investors who have extensive knowledge surrounding rental, flip, and/or new-build properties are the best candidates for investing in real estate.

Since real estate investments require more paperwork and detailed management than a typical investment, many investment groups don’t offer this option, or charge higher fees for their administration. Besides forgetting about additional fees that come with real estate investments, here are a few more mistakes real estate investors make:

  • Renting to disqualified people. Many investors wonder if they can purchase a property with their IRA and use it for personal use or rent it to family. The answer is no on both accounts. Strict IRA Real Estate rules prohibit you or immediate family benefitting from or using the property in any way. This includes space to run a business, primary residence, or having connections to the rental company who operates on the property (such as an apartment complex).
  • Putting personal equity into the property. Again, you must not benefit from the property in any way, other than at retirement. If you use personal funds for maintenance costs, the value will increase, and your investment will increase without any deductions. The same goes for “sweat equity”, or time you devote to repairing projects yourself. All maintenance costs, bills, taxes, and other fees must be paid for with your IRA money.
  • Personally benefitting from profits. Just like you can’t put personal equity into the property, you can’t directly profit from the property either. For instance, you can’t take personal checks for rent payable to you. All generated income must be paid to the IRA itself. All profits and gains from the property are assessed when you take a deduction on your IRA or when you decide to transfer funds into another investment.
  • Improperly filling out paperwork. Like other investments, real estate investments are made in the name of your IRA, not you. When filling out paperwork involving the property, transferring money, and accepting profits, you must always list actions as performed by your IRA.

Liquidating upon retirement. You won’t be required to sell any of your IRA investments upon retirement. Even traditional IRAs, which require minimum distributions once you reach 72, don’t force you to sell all of your investments in fulfilling this obligation. If the real estate market is in a down swing, you may want to wait until the value increases again before using the profits for your retirement. Remember to discuss all transactions with your financial planner before taking action.

One thought on “Mistakes Real Estate IRA Investors Make

  1. Is it possible to buy a property 50% SDIRA/ 50% other personal funds? So whatever the profit is can be split between to the two equally.

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