Tips on Buying Real Estate with your IRA in – NC Off Market Pros

While most people understand that real estate is an investment, many people are taking advantage of qualified retirement accounts to purchase real estate as an appreciating or revenue-generating instrument like IRAs.

It’s really important to understand the tax implications, legal ramifications, and various other intricacies of purchasing real estate within your IRA.

Investing in real estate with your Individual Retirement Account (IRA) can be a smart way to diversify your retirement portfolio and potentially benefit from the long-term growth of real estate. However, it’s important to follow IRS rules and guidelines to ensure you’re in compliance.

So, let’s dive into some tips on buying real estate with your IRA in North Carolina!

Tips on Buying Real Estate With Your IRA in 

If you don’t have a self-directed type IRA… first off… you’ll need to connect with your trusted financial advisor to find a reputable and low-fee self-directed IRA. Or, connect with us and we can direct you to some very good self-directed IRA companies we’ve worked with in the past.

If you already have a Traditional or Roth IRA with a custodian that doesn’t allow real estate investments, you may need to transfer or rollover your funds to a Self-Directed IRA custodian that specializes in real estate investments.

Open a Self-Directed IRA

The first step for purchasing investment properties in within your IRA is to open a “self-directed” IRA. You can do this by visiting a qualified financial advisor or other trusted fiduciary to act as the IRA custodian. A fee-only financial advisor can help you set up this account with minimal hassle, while a commission-based financial advisor may attempt to steer you clear of purchasing tangible assets within your IRA (he or she won’t earn much on the investment).

Types of Properties You Can Buy With Your IRA and Rules

You can own a wide variety of properties within your IRA, including residential, commercial, and industrial structures, as well as unused land. Many savvy investors choose to purchase parking lots, storage unit facilities, and other types of property that require little maintenance but generate steady income.

The IRS has strict rules about what you can and cannot do with real estate investments in an IRA. For example, you cannot use the property for personal use, and you cannot buy a property from or sell a property to certain family members.

Your IRA cannot own any home where you live or vacation. Legally, you aren’t even allowed to spend one night on the property. You cannot avoid this restriction by “renting” the property from your IRA, or renting to your spouse, children, grandchildren, parents, or grandparents, nor can you use an IRA to purchase a property from a close family. You could, however, rent property to a sibling, cousin, or friend. A solution that many investors implement is to purchase a home for their IRA, rent it out for income until retirement, and then assume residence upon retirement.

How Does Income Work With Real Estate In An IRA?

The income generated in your IRA may not be used for your “personal current benefit.” This means that all income generated by the property must remain within the IRA until you retire. Selling the property will require you to leave all profits within your IRA. Also, property taxes, insurance, improvements, and other costs associated with the property must be paid by the IRA. Failure to comply with these regulations could disqualify your IRA, subjecting you to income taxes on the entire value of the property, plus a 10% early distribution penalty.

It’s important that all distribution rules associated with an IRA (or Roth IRA) including taxation, required minimum distributions, beneficiaries, and other factors do not change when using a self-directed IRA to purchase a property. There can be a huge upside to real estate in your IRA, but it’s best to know exactly what’s in store.

Buying real estate with an IRA can involve additional costs, such as custodial fees and transaction fees. Make sure you understand these fees and how they can impact your returns. Just like any other real estate investment, conduct thorough due diligence on the property you’re considering. This includes inspections, appraisals, and market research.

Some investors choose to set up a Real Estate IRA LLC, also known as a Checkbook IRA, to have more control over their investments and streamline transactions. This structure can make it easier to manage rental income and expenses.

Real estate and tax laws can be complex. It’s highly recommended to consult with a financial advisor, tax professional, and legal counsel who is well-versed in self-directed IRAs and real estate investments.

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