Real estate is exactly as it sounds, a tangible property, whether it is raw land or anything on the land, including businesses and houses. Investment properties can include long-term rental income-generating properties, short-term ‘fix and flip’, apartments, condominiums, commercial properties, or land.
Real Estate in your self-directed IRA is a popular investment strategy for those who are familiar with property ownership and can follow the IRS regulations surrounding investment properties. Holding real estate can be tricky, so we are going to break down some of the common mistakes to avoid when purchasing an investment property. Your real estate purchase must be strictly for an investment. You cannot use it as a vacation home, second home, or office for your business.
Disqualified Persons – A disqualified person is an individual or an entity that is not allowed to transact with the IRA. You cannot purchase an investment property from a disqualified person and subsequently cannot sell it to a disqualified person. In addition to the purchase transaction, a disqualified person cannot live in the home or do any type of improvements or repairs on the home. Who is disqualified? The IRA chart below will provide you with a quick look at who is categorized as a disqualified person.
All documents relating to the purchase of the investment property should list the custodian as the purchaser and include all contact information and EIN associated with the retirement account. The account owner should not be listed on any documents as the purchaser and should not sign the documents. Your custodian may require you to initial the documents as read and approved but will sign all documents on behalf of your IRA.
Although you can be your property manager, it is not recommended. Hiring a property manager will ensure that expenses, repairs, and rental income are processed and completed correctly. Your rental income will be submitted to the property manager and then returned to the IRA for processing, and any expenses on the property will filter through the property manager and to the IRA for payment. Your IRA will be responsible for the payment associated with the percentage of ownership. For example, if your IRA owns 100% of the property, then 100% of the rental income and repairs will filter back to the IRA. However, if the IRA only owns 25% of the property, then your IRA is responsible for 25% of the repairs and will receive 25% of the rental income.
No, you cannot. To process this transaction, the IRA would need to purchase the property from you, and according to the IRS, you are considered a disqualified person and would be participating in a self-dealing transaction. It is important to note that you also cannot be the realtor in the purchase of the property if you are receiving a commission for the transaction.
Absolutely! So long as you follow the guidelines set forth by the IRS, as we discussed above, you can use your Roth IRA to purchase the investment property. Purchasing an investment property using your Roth IRA offers advantages such as high returns, tax-free growth, and tangible asset ownership. The bonus to do this is that all income received will be tax-free upon distribution of the funds.
Investing in real estate through a self-directed IRA offers tangible diversification and tax-efficient growth—but only if you follow IRS rules to the letter.
With strict compliance and the right partners, your IRA can become a powerful real-estate vehicle—generating income and building wealth without jeopardizing its tax-advantaged status.