Although many people don’t know this, using the IRA to invest in real estate has been allowed since 1974. The IRA (Individual Retirement Account) is a long-term savings account that people with earned income can open to save for the future while enjoying tax breaks. With your IRA, you can invest in virtually any type of real estate, including malls, boat slips, warehouses, cemetery plots, and, more typically, houses and apartment buildings. However, you can’t use an IRA to purchase a personal residence or vacation home.

Having said that, here are a few things you should know about using your IRA to invest in real estate:

IRS Rules

When investing in real estate using your IRA, ensure that you note the following IRS rules. Also, note that these rules don’t apply to people over 59 ½ years.

The Self-Dealing Rule

The self-dealing rule states that you can’t receive immediate personal benefits from a transaction. For instance, you can use an IRA to buy a cabin in the woods and rent it out, with the rental income typically going into your IRA account. But you can’t use the cabin as a vacation property for yourself. This ensures that your investment grows, and isn’t misused!

The Sweat Rule

Basically, with the sweat rule, you can’t invest “sweat equity” in any investment. For instance, you can’t renovate a property yourself but can pay someone else to do the work. That means you’ll have to invest in excellent deals to justify the expense of hiring professionals to do your renovation work.

Benefits of Using an IRA to Invest in Real Estate

Here are the key benefits of investing in real estate using an IRA:

The Split Option

An interesting advantage of using an IRA is the ability to split the ownership and proceeds. For example, you can buy a property and pay half with your IRA and get a mortgage for the other half. If you sell or rent the property, half the proceeds will go to your IRA and the other half to your bank account.

Tax Advantages

There are substantial tax benefits to investing in real estate with your IRA. Keep in mind that with a conventional IRA, you’ll owe no tax on any capital gains until you start making withdrawals at retirement.

Use Your IRA to Invest in Real Estate

Using an IRA to invest in real estate is one of the smartest ways to invest. You can fund a down payment, allowing you to buy properties without out-of-pocket funds. However, speak to a property expert before you take the plunge. As with any other investment, professional advice can spare you a lot of headaches. Call us today and let us help you!