Real Estate IRA Basics FAQ

If you’re coming here because you saw something on the Web about real estate IRAs, or you heard something from a friend, you came to the right place. Yes, real estate IRA investing is legal, has a long track record of success, and is an increasingly popular option for investors who understand the asset class, or who are looking to diversify further.

Is it legal?

Yes, real estate investing within your IRA is quite legal. That’s even true for foreign real estate – the assets aren’t restricted

What are the advantages?

The advantages to real estate within an IRA, compared to other asset classes, are many:

Downside protection. Compared to conventional financial products such as stocks, bonds and mutual funds, real estate has a crucial advantage: Any stock or bond can potentially fall to zero overnight. This is not true for real estate. No matter what happens to the economy, or to Wall Street, at the end of the day a house is a house, and will have value as long as people need a place to live. That’s substantial downside protection.

Simplicity. Further, real estate is easy for most people to grasp. You don’t have to be a financial guru to be a successful real estate investor. Just have a good grasp of numbers and a good feel for a property’s potential value and how to unlock it.

Potential steady income stream. For most of us, retirement is about income generation. Real estate has a centuries-long and proven track record as a reliable income generator through all kinds of economic cycles and upheavals.

Inflation protection. The dollar is almost certain to lose value over the long haul as inflation takes its course. Land and buildings tend to go up, even as the dollar loses value.

Tax deferral. Most landlords have to pay income tax on rental income – a substantial current year cash flow burden. If you hold your real estate in an IRA, however, any rental income tax is deferred until such time as you withdraw the money from the IRA. In the case of Roth IRAs, withdrawals are potentially tax-free, as long as your money has remained within the IRA at least five years.

How big an account do I need?

There’s no specific minimum size. Just be aware that any expenses the IRA incurs has to be met using cash available within the IRA, plus any allowable contributions for the year, which could be limited by your income.

I heard I can’t borrow money in my IRA. Is this true?

Here’s the deal: Your self-directed IRA can, in fact, borrow money, but only on a non-recourse basis. That means the lender can have no claim or collateral on any asset outside of the IRA itself. It is true that you cannot pledge assets in your IRA as collateral for a loan made to you, personally, and you cannot pledge non-IRA assets in a loan made to your IRA. But IRAs and other retirement plans can and do borrow money every day.

Before you borrow, though, understand that any profits or income attributable to borrowed money may be subject to unrelated business income tax.

Are no money down options available?

Normally no. Typically, lenders willing to make loans to self-directed retirement accounts to buy real estate require a down payment of 35 percent or more. It is possible, however, to partner with your Real estate IRA! That way, you can provide the down payment with your own funds, and your real estate IRA picks up the rest, or vice versa. See this article for more information.

What restrictions apply?

You cannot use any property your self-directed IRA owns for your own personal use, or for your spouse’s use. This is true even if your self-directed IRA only owns a tiny fraction of the property-if it owns a single penny’s interest in your property, you cannot use the property for yourself or your spouse.

The same applies to select family members, including ascendants, descendants, their spouses, and any financial, tax or legal advisors working with you on the self-directed IRA and their spouses.

You cannot personally lend money to or borrow money from your self-directed IRA, nor may any prohibited party described above. Nor may any entities they control. Neither may any prohibited party.

You cannot sell property to, nor buy property directly from, your own self-directed IRA. Nor may any prohibited individual or entity. You also cannot directly provide services to your self-directed IRA, nor may any prohibited party, nor may any entity they control. That means you can’t hire your own company to do repairs on the property, and you can’t hire your son as the property manager to oversee the real estate held within your self-directed IRA.

Where can I find out more?

To open an account with American IRA, or simply to learn more about the flexibility and benefits of self-directed IRA accounts, including real estate IRAs and IRA partnerships, call us today at 866-7500-IRA(472).