If you are an investor looking beyond stocks, bonds and mutual funds for retirement investment strategies, you may be considering investing in real estate. A growing number of individuals have discovered they can use the money in their IRAs to buy real estate, and as a result, we’ve received numerous questions surrounding this topic on our Financial Coach Website. Let’s break it down for you:

Can you invest in real estate within your IRA?

The simple answer is, yes. Within your IRA, you can own undeveloped land, apartments, single-family homes, duplexes, and commercial property. The details and rules involved in these types of investments are a little more complex than just a simple “yes,” so always keep in mind, just because you CAN, doesn’t mean you SHOULD.

First, you will have to change your IRA custodian, since investing in real estate within your IRA is considered a non-traditional investment and many banks and brokerage firms don’t allow non-traditional investments in their IRAs. Changing custodians can amount to hundreds or thousands of dollars in fees, so due diligence is advised.

While IRA investments in real estate are not prohibited, certain rules must be followed in order to avoid a prohibited transaction. Below are several of the main facts to take into consideration:

IRA Real Estate Investment Rules

You must use your IRA to pay for the property in full. You can’t use your IRA for a down payment and mortgage the rest of the property.

Although you can own property, it cannot directly benefit you or your relatives.

Your IRA needs to have enough spare cash to pay expenses related to your property such as taxes and maintenance costs because all expenses must be paid out of the IRA, and all income must flow into it.

And then there’s the tax implications. If you own property within your IRA, you’ll forfeit the traditional real estate tax advantages. You won’t be able to deduct property taxes and you can’t use depreciation.

Selling the property? That’s another area to take a look at. From a capital gains standpoint, if you own a property and sell it you’d only be required to pay capital gains on the increase. If the transaction takes place within an IRA the full amount becomes taxable.
So, what’s the bottom line here? If you are looking for ways to diversify your investments and you are considering real estate, it’s smart to talk to a registered investment advisor to explore this and other possible options that may be better for you.

The worst thing you can do is to talk to real estate agents or companies that promote real estate investments when making your decision. Remember, much like “financial advisors,” these are salespeople who may not fully disclose all of the information you need to make a prudent decision. In addition, there are plenty of investment advisors who aren’t even aware of all the rules.

For more information on IRAs and real estate investing, check out our video blog on the topic.

About The Author:

Bryan’s logical approach to investing and his determination to expose corrupt practices in the industry has led him to spearhead his own financial education company and gained him recognition with publications such as the Wall-Street Journal, US Senior News, Investment News, Financial Advisor Magazine, Forbes, Fortune, Kiplinger’s, Investment Advisor Magazine. Bryan can also be heard on his weekly radio show, The Financial Coach, which is broadcast in St. Louis, MO, where he resides.

Know More about Bryan at http://thefinancialcoach.com