How to Use a Self-Directed IRA to Invest in Real Estate

Real estate is one of the most time-honored long-term investments for one simple reason: land is scarce. This keeps real estate as a potential storehouse of value for any investor who wants to retain some wealth in retirement. But not many people know that you can use tax protections with a Self-Directed IRA and hold real estate assets in those accounts. Does it sound complex? It shouldn’t. Here are some key ways to use a Self-Directed IRA to invest in real estate the right way.

Setting Up Your Self-Directed IRA for Real Estate

The first step to investing in real estate with a Self-Directed IRA? Simple. Set up your account the right way. This involves selecting a custodian who specializes in Self-Directed IRAs. American IRA can help for example. A custodian like American IRA will help you handle regulatory requirements to ensure your investments comply with IRS rules. Once you’ve chosen a custodian? You’ll need to fund your Self-Directed IRA. This can be done by rolling over funds from an existing retirement account or making a direct contribution.

With your Self-Directed IRA funded, you’re ready to start investing in real estate. This process typically involves identifying a suitable property first. Then perform your due diligence before making a purchase through your IRA. And remember: the property must be for investment purposes only. Personal use is prohibited by IRS regulations.

Identifying and Purchasing Real Estate

Real estate isn’t always a predictable investment. One piece of property might be a spectacular opportunity while another might land you under water. If you want to make sure that you’re doing right by your retirement strategy, you need to think things through before you invest. What about associated costs? What about property taxes? Insurance? Maintenance? All expenses related to the property will come out of your Self-Directed IRA, and income it generates will go to the IRA—so keep that in mind as well.

To purchase the property, your custodian will administer the transaction, ensuring that the title of the property is held in the name of the IRA. This is key. It means you’re not buying the property personally. The Self-Directed IRA is making the purchase. Without this distinction, you might not be able to maintain the tax-advantaged status of your retirement account.

Managing Your Real Estate Investment

Managing real estate within a Self-Directed IRA will require that you stick to some basic rules to avoid prohibited transactions. You can’t perform repairs or maintenance on the property yourself, for example. Instead, you must hire third-party professionals. Additionally, you and your immediate family members can’t use the property for personal purposes.

Rental income generated from the property has to go directly to the Self-Directed IRA. This income is tax-deferred, or tax-free in the case of a Roth IRA. And that’s good! Your investment can grow more efficiently in a tax-protected account. And don’t forget that expenses like property management fees, repairs, and taxes all have to come out of your IRA’s funds.

Many investors choose to hire a property management company to handle the day-to-day operations of the rental property. This can simplify the process, making sure all transactions are handled correctly and keeping your investment compliant with IRS regulations.

Leveraging Real Estate for Long-Term Growth

Investing in real estate through a Self-Directed IRA can seem daunting at first, but with the right guidance and planning, it can be a rewarding strategy for building retirement wealth. If you’re interested in learning more about how to use a Self-Directed IRA to invest in real estate, call 866-7500-IRA.

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