Use Your IRA To Purchase Real Estate

Posted on December 9, 2013 by Alan Potts

Like many Americans, you may have an IRA or 401(k) rollover account to make your retirement years more comfortable.  Many consumers have grown tired of the daily financial roller coaster ride and the general risk of the current market.  Wild market swings have increased and tend to happen because of a combination of controversial legislative agendas and the fact that major financial institutions now use high speed computers to create the majority of transactions. The buying and selling strategy is generally based on price spreads, not long-term market value.  This puts brokers and everyday IRA holders at a timing and knowledge disadvantage.  This, in turn, leaves IRA holders feeling like their efforts are “too little too late” as they now find that their accounts are finally back to where they were 10 years ago.

Many IRA holders are asking, “Why can’t I take advantage of today’s real estate market and use my IRA to purchase real estate?

The answer is – you can!

In 1974, Congress passed a set of federal laws and regulations called the Employee Retirement Income Security Act of 1974 (ERISA).  This act allowed IRA holders to invest their IRA accounts in stocks, bonds, mutual funds, and other approved investments.  Importantly, these approved investments included real estate.

If you want to invest some or all of your IRA in real estate, you must first be aware that Real Estate IRAs are an IRS approved investment alternative.  Then, you must understand how Real Estate IRAs can provide you return and risk management possibilities.

Once your decision is made, you will rollover some or all of your IRA account to a real estate friendly custodian.  Since most IRA custodians are equity investment firms, they promote, sell and make commissions on these types of products.  The new real estate friendly custodian will provide educational materials, the necessary paperwork, and guidance through the administrative process.

Today, there are more Real Estate IRA custodians, but deciding which custodian is right for you will require some research.

When you consider using your IRA to purchase real estate there are three major steps.

First, determine the property you want to purchase.   There is an old saying about the 3 most important things when buying property.  They are “location, location, location”.  You should also consider how the property will be used, how long the holding period is, and how this will affect your short and long-term objectives. These are critical to the enjoyment of your purchase and the financial results that will occur when you sell your property.

Second, decide how to structure the Real Estate IRA transaction.  When someone structures their IRA to purchase real estate there are two different ways in which the IRA can be used. In Method #1, the real estate is titled so that the IRA owns the property.  Because the IRA holds title, certain guidelines and rules apply as to how the property can be purchased and how the property can be used and not used.  This approach is used when the IRA holder wants to invest for investment purposes only.

With Method #2, the property is titled individually and is owned outright. When the individual holds title, different guidelines and rules apply as to how the property is purchased and how the property can be used during the purchasing period.  This approach is used when the IRA holder wants to invest for personal use.  The pros and cons of each method should be carefully studied and understood before you make any changes to your IRA.

Third, decide which custodian is best for you.  Your custodian/advisor must be able to help you decide which purchasing approach is best for you and help structure your transaction so that you will use the proper documents and correctly purchase the property.  In addition, your advisor/custodian should provide ongoing service and compliance reviews to keep you informed of any tax law changes.

Real Estate IRAs are similar to 1031 Tax Deferred Exchanges; both have been around since the 1970’s and real estate investors must carefully learn about these financial transactions before either can be used.   Knowing that Real Estate IRAs are an option can help real estate investors / IRA holders take advantage of today’s buyer’s market, provide risk management opportunities and create something they did not previously know was possible.

Editors Note: This article is for informational use only.  Readers are advised to discuss this information with their legal and/or tax advisor in order to gain more knowledge on this topic.

Alan N. Potts is a Chartered Financial Consultant.  He can be reached at 1.800.525.1893 or [email protected].  For his free Question and Answer Guide, please go to his website:

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