Real Estate in Your Self-Directed IRA


30 Sep Real Estate in Your Self-Directed IRA

If you're running a self-directed retirement account, you can think about adding real estate investing to your portfolio. Real estate is a great way to diversify – and it comes with some specific advantages over equities or other kinds of asset-based investment.

Learn how Privy's unique platform can help you invest in real estate with confidence.  

If you're running a self-directed retirement account, you can think about adding real estate investing to your portfolio. Real estate is a great way to diversify – and it comes with some specific advantages over equities or other kinds of asset-based investment.

Investors do this all the time. They utilize the advantages of their IRA to buy properties or otherwise get involved in real estate. The most savvy savers are considering how to get some of the unique financial rewards of investing in properties, through the vehicle of their self-directed retirement accounts.

using IRA to invest in real estate

What Types of Real Estate Can I Include in a Self-Directed IRA?

An investor can get into all sorts of real estate with a self-directed IRA. Self-directed IRAs allow for the purchase of residential, commercial or industrial real estate. They even allow for the purchase of unbuilt property lots.

Some real estate investors like to buy up undeveloped property and subdivide it into buildable lots. They work with municipalities to create new lot lines that allow them to build on these real estate parcels. Others like to specialize – instead of buying widely different types of properties, they will focus on single-family homes, condominiums or townhouses, or single-year commercial lease properties – you get the picture. The idea is that specialization helps the investor to be more of an expert in a niche area of the market.

Self-directed IRAs allow for a wide spectrum of real estate investments. Think about how your IRA can help fund your portfolio in a local market.

Types of Real Estate Not Allowed in Self-Directed IRAs

As mentioned, real estate investors can participate in all sorts of real estate purchases with a self-directed IRA. However, there are some key ground rules.

One of the biggest guidelines in real estate investing with a self-directed IRA is avoiding what experts call ‘self-dealing.’

The bottom line is that in real estate investing with a self-directed IRA, it's important to avoid having a personal stake in the property.

IRA investors can't help fund their own purchase with IRA money. They can't use the IRA to make supplemental purchases. They can't even personally work on the properties that they have bought with the IRA, as this is also considered self-dealing. If you're the type who wants to have sweat equity in an IRA real estate deal, funding with the self-directed IRA might not be for you.

These prohibitions on real estate investing are done in order to make sure that investors don't abuse the IRS tax benefits of the retirement account. However, some see them as excessively draconian restrictions, and choose to get into real estate in a different way.

There's also the criticism that many of these self-directed IRA rules around real estate are very nebulous. There are rules about having family members move into a property. That might be subject to interpretation on time frame, etc. Some of these rules on sweat equity can be fairly vague.

It gets tricky, partly because property investment is such an inherently personal endeavor. Many of us have been acculturated to a model of “self-work” – we want to work on the properties ourselves, rather than paying contractors to do everything. The rules are hard to enforce, but in various ways, the IRS might get you on a technicality. So in these cases it's better to avoid using the IRA because if it's compromised, all of the IRA funds can be taxable.

What Can I Do with Real Estate in my IRA?

As long as you stay away from self-dealing in all of its forms, investors can do a lot with real estate in a self-directed IRA. Running the funds through a custodian allows for capital gains from real estate appreciation. It also allows for some proceeds from various forms of property management or property improvement. Investors can add value to a property using trusted skilled contractors, again, as long as there's not the threat of self-dealing – for instance, if this trusted contractor is a family member, that may not be kosher.

As in other kinds of real estate investing, there's a lot that portfolio holders can do with IRA funds. Use the IRA to get involved in a relatively illiquid market where long-term holding often provides good gains.

Using Real Estate Data

After you've figured out what you want to do with a self-directed IRA for real estate, the question is which properties you'll invest in.

Privy is a unique real estate data platform that helps investors to move forward with confidence. Use our comps and other tools to come up with informed opinions, not guesswork. Get the right real estate into your portfolio for bigger gains over time. Privy allows tech-savvy real estate pros to get the inside scoop on a local neighborhood – which is a valuable part of a real estate strategy. Learn more and see how this platform can drive growth in your real estate investment plan.

Download: Comparison Guide - What to Look for in Evaluating REI Tools


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