What Most Investors Don’t Know About the Real Estate IRA

What Most Investors Don’t Know About the Real Estate IRA

You might know that real estate can be a great investment. You might even know that it can be a vital part of a retirement portfolio. But you’d be surprised at just how few people understand the Real Estate IRA and what it entails in terms of protections, limitations, and opportunities for growth.

As the old saying goes, however: “knowledge is power.” If you want to expand the range of possibilities for your portfolio, it’s time to learn what most investors don’t know about the Real Estate IRA:

Real Estate IRA Investment Options and Capabilities

Let’s start with the fun stuff—what you can do when buying real estate through a Self-Directed IRA:

  • Borrowing money. You can borrow money any time you can convince a bank to lend you some, of course. But what many investors don’t know is that they can borrow money within a Real Estate IRA to purchase the real estate. This happens through non-recourse loans, which is a limitation, but also a protection: it means the bank can’t come for the rest of your assets should the IRA default on the loan. It’s rare that you see opportunities and protections packaged into one interaction, but with the Real Estate IRA, it’s possible.
  • Property managing. You don’t have to do it. In fact, you won’t be doing it, as the property manager will be collecting income and handling expenses while any profit left over will go into your retirement account. This keeps the property hands-off for the investor while any profits roll in on a passive basis.
  • Selling property. When you sell property within your Real Estate IRA, it will be a bit like selling stock within an IRA—you’re not going to have to pay capital gains taxes that year. This is a tremendous benefit for investors who are operating on thin margins and need to squeeze profit out of their investments while they build long-term equity.
  • Partnership is still possible. Partnering with others and even yourself can be done when you acquire the asset, although it’s always a good idea to talk to an expert to make sure you’re following all the rules.

Of course, even a great account like an IRA has its limitations.

Real Estate IRA Restrictions and Limitations

Why doesn’t everyone invest in real estate using their IRA? Because there are restrictions designed to keep these investments aimed at long-term growth. Otherwise, any real estate investor could use the IRA for their house-flipping business. Here are some vital limitations to keep in mind:

  • You cannot use the property. Sorry, no owning your own home through a Real Estate IRA—it has to be for investment purposes only.
  • All legal documents should be “vested” in the name of your IRA. Although you own the IRA, the IRA itself is considered a separate entity for a variety of legal and financial purposes. This is why there are some separation limitations, such as…
  • You cannot fix the property yourself. If you want to use a real estate investment to satisfy your DIY nature, you can’t do it within a Real Estate IRA.

These limitations and protections are for keeping your real estate investments as exactly that—investments. Using them in personal ways flies in the face of keeping that separate entity for your retirement investment purposes.

To learn more about Real Estate IRAs and both the limitations and opportunities packed with them, visit our Real Estate IRA guide. The more you learn, the better you’ll be able to make real estate work for your retirement strategy.

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