Do’s and Don’ts of Real Estate IRA Investing
Real Estate IRA Do’s
- Open an account with a qualified IRA third-party administrator or custodian firm and move funds into it before buying anything. You cannot just buy a property and then hope to transfer it to your Real Estate IRA later, after having bought it in your own name. You have to fund the purchase using money from within your IRA (or other retirement account). Otherwise you will not receive the tax advantages of the Real Estate IRA.
- Do careful due diligence before you invest. There’s risk in all real estate investing, and Real Estate IRA investments are no exception. No custodian or third-party administrator can guarantee investments of this type.
- Do learn about prohibited transaction rules. The law prohibits IRA accounts from transacting directly with the IRA owner (you), your spouse, your children or grandchildren or those of your spouse, your parents and grandparents and those of your spouse, and any entities they control. You cannot use your IRA to sell to them, buy from them, lend to them or borrow from them. Your IRA also cannot transact directly with corporations, LLCs and other businesses in which any disqualified individual or combination of disqualified individuals owns a controlling interest. Likewise, you cannot use your IRA to transact with any advisor who works with you on your IRA in a fiduciary role. If you do, the IRS could disallow part or all of your Real Estate IRA and force you to take a distribution of the disqualified amount.
- Keep your personal and IRA accounts strictly segregated. You cannot pay for any remodeling, management, repair or any other costs associated with your Real Estate IRA property using money from your personal checking account. Technically, you can’t even change a lightbulb in your Real Estate IRA unless you use money from within your IRA to buy the new lightbulb. Naturally, you should keep careful records of all your transactions.
Real Estate IRA Don’ts
- Don’t stay overnight in your Real Estate IRA property – even if you’re working on repairing it, and even if you pay your Real Estate IRA the market rent while you’re staying there. Doing so amounts to a prohibited transaction and could result in the IRS forcing you to take the full value of the property as a distribution – resulting in taxes and penalties.
- Don’t attempt to pay yourself a salary or hourly wage or any other form of direct compensation for work you do on your property. The same goes for any other disqualified individual listed above.
- Don’t take rent payments directly. Always have rent payments paid directly to your IRA, and not to your personal account. Checks should be made payable to your IRA, not to you. Send them to us, or have your tenant send them to us, and we’ll have them deposited to your IRA account while staying in compliance with applicable laws.