investing in real estate for retirement

Using retirement funds to invest in real estate? 10 need-to-read tips

Bethany RamosFinance, Home Buying, Homeowners, Vacation Homes

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June 14, 2019.

Are you interested in investing in real estate? If yes, then consider using retirement funds to do it. There’s a misconception that you can use retirement accounts only for traditional financial investments like stocks and mutual funds. But you can actually use retirement funds, as well as a self-directed IRA, to make real estate investments.

According to the IRS, you can invest your retirement funds in any type of investment apart from life insurance, those involving a disqualified person(s), or collectibles.

You should buy real estate with retirement funds — here’s why

One of the main advantages of buying real estate with retirement funds is that all the gains are tax-deferred until you take a distribution. In the case of a Roth account, the distributions will be tax-free.

For instance:

  • You purchased real estate using retirement funds for $200,000.
  • You later sold it for $350,000.
  • The $150,000 of gain appreciation will be tax-deferred.

On the other hand, if you purchased the property using personal funds, the gain would be subjected to federal income tax. In most cases, it may also be subjected to state income tax.

 Some common vehicles for purchasing real estate with retirement funds include:

  • Self-directed IRA: This is the most popular way to buy real estate with retirement funds. You can establish a self-directed IRA quickly, and it’s relatively inexpensive. The entire process barely takes a few days to complete.
  • Employer-sponsored 401(k) plan: You can consider this option if your employer 401(k) plan offers real estate as an investment option.

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10 must-know tips to make real estate investing easy

If you’re wondering how to invest in real estate, these tips can help:

1. Pay the following using your retirement accounts:

Never use personal funds for the real estate investment.

2. Don’t partner with a disqualified person.

This could trigger the IRS prohibited transaction rules.

3. Use only non-recourse financing if you need financing for a real estate transaction.

A non-recourse loan is one that’s not personally guaranteed by the retirement account holder or a disqualified person. This means that the lender’s only discourse is against the property, not against the borrower.

4. If you want to use a non-recourse loan to purchase real estate with a self-directed IRA, UBTI (unrelated business taxable income) could apply.

The tax rate could reach as high as 40 percent.

5. The title of the real estate should be in the name of the retirement account.

6. Maintain records of income and expenses generated by the retirement account.

7. Allocate all the income, gains, and losses from the retirement account real estate investment to the retirement account of the owner of the investment.

8. Do due diligence of the property you’re interested in investing in.

This is really important if you’re looking to invest in a property outside the state you live in.

9. If you’re using a self-directed IRA LLC to buy real estate, form the LLC in the state where the real estate is located.

This helps you avoid additional filing fees.

10. Check if there are any annual state LLC filing or franchise fees.

Lastly, beware of fraudulent investments if you’re purchasing real estate from a promoter.

Real estate investing is a smart way to diversify your financial portfolio and make significant gains in the future. Still, don’t rush into it. Learn everything you need to know about investing in real estate before taking the leap. Ensure that the property is a good one and has the potential to appreciate in value over time.

Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, Arizona. He has over three decades of experience working with investments and retirement planning and, over the last 10 years, has turned his focus to self-directed accounts and alternative investments. Rick regularly posts helpful tips and articles on his blog at SD Retirement, as well as, SAP, MoneyForLunch, Biggerpocket, SocialMediaToday, and NuWireInvestor. If you need help and guidance with traditional or alternative investments, email him at [email protected].

Cornerstone Home Lending and its affiliates do not provide financial planning, tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, financial planning, tax, legal or accounting advice. You should consult your own financial planning, tax, legal and accounting advisors before engaging in any transaction.

For educational purposes only. Please contact your qualified professional for specific guidance.

Sources are deemed reliable but not guaranteed.

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