Financing Property or Buying a Retirement Home: Why Using a Real Estate IRA Makes Sense

Plan for retirement

What should you do with your Real Estate IRA? If you are a Baby Boomer, you may want to consider using a Real Estate IRA to purchase that dream home before you hit retirement. Then, when you reach age 59 ½, you can take the home as a distribution and begin enjoying your new retirement home. Remember, you may not use this home for your own personal use until you reach 59 ½ and take the home as a distribution.

One important point that people forget when talking about taking a home as a distribution is the taxes due on distributions. If the home was held in a Traditional IRA, then taxes will be due on the amount of the distribution (the appraised value of the home) in accordance with the individual’s tax bracket. That’s why most people recommend using a Roth IRA for this strategy. With a Roth IRA, taxes are due at the time contributions are made, after that all profits grow tax-free and since you paid the taxes at the time the contributions were made, distributions are tax-free as long as you have reached age 59 ½ and the account has been open for at least 5 years.

Invest in Your Future

Those who use Real Estate IRAs have no limit on the number of homes they may flip each year. In most cases, the profits grow tax-free or tax-deferred within your IRA. In the event that your IRA flips homes at such a high volume that it is deemed to be running a business, Un-related Business Income Tax may apply. Please contact your professionals (CPA/Attorney) to determine whether your IRA may be subject to UBIT.

Your retirement account can be a great source of revenue to purchase real estate. Also, if you want to buy a property that costs more than what you have in your IRA, it is possible for an IRA holder to purchase the property with a combination of funds from their IRA and a non-recourse loan.

Liquidity is king, this holds true when investing inside and outside an IRA. It is important to make sure your IRA has sufficient reserves built in to cover any repairs/maintenance the homes may need.

Is Owning a Real Estate IRA Too Much of a Risk?

If you understand structuring an IRA and tax rules, it may be less of a risk than you realize. An account holder can rent out property owned by their IRA to a third party and make money before retiring. However, if you do not have a firm grasp on IRA tax rules, it is best to seek the advice of an attorney and/or a CPA. Ignorance about IRAs used for real estate will not dismiss tax penalties if you misinterpret Real Estate IRA laws.

Some experts argue that IRAs used for real estate purposes are a great way to boost finances. An IRA can appreciate substantially over time, if property owners have patience.

The Case is Made for Man-Made Profit

If the rent is $600 a month ($7,200 per year), the profit is $4,200 after paying $3,000 in expenses annually. This $4,200 does not move from the IRA. How much profit have you made in 20 years? Rental funds in the IRA are $84,000 ($4,200 per year x 20 years) plus your IRA still owns the house.

Real Estate IRA owners also have the flexibility of buying not only single-family homes, but also multi-family homes, apartment buildings, and commercial properties. They are not limited to options on paper, but can own property that has value that is seen outwardly. It offers more of a return than relying on a traditional money market or 401K retirement account. For younger couples and singles, it is a good way to save.