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Rules of Buying Real Estate in an IRA

You Can Buy Real Estate With IRA Money, But Should You?


Hispanic woman looking at real estate sign
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Yes, you can buy real estate in your IRA, so the question is not can you buy real estate in your IRA, but should you? In most cases I think the answer is no.

Basic Things to Consider About Owning Real Estate in Your IRA

Here are a few key points to know before you buy real estate with IRA money:

  • You can’t mortgage the property.
  • You can’t do any of the work yourself so you must pay for an independent person to do any repairs or work needed.
  • You don’t get the tax breaks if the property operates at a loss, nor can you claim depreciation.
  • You must pay all costs associated with the property out of the IRA and deposit all income into the IRA – if you don’t have enough cash in your IRA and a major property expense comes up, this can put you in a bad situation.
  • You cannot receive any personal benefit from the property – which means you can’t live in it or use it in any way. The real estate owned by your IRA must strictly be for investment purposes.

You Can’t Buy Real Estate in Your IRA That You Will Use Personally

When people first hear they can legally buy real estate with IRA money, they get excited thinking they can use their IRA funds to buy a vacation property, or a house they might rent to their children. Sorry, it doesn’t work that way.

The IRS contains strict rules that must be followed, and any investment made by your IRA must be considered an arms length transaction. That means you can’t use money in your IRA to buy or sell real estate to or from yourself or family members and you can’t receive any personal benefit from any real estate owned by your IRA, which means it can’t be a piece of property that you use for yourself in any way shape or form.

Nor can you receive any indirect benefit from real estate owned by your IRA. So for example, you can’t pay yourself or a family member to be the property manager. As a matter of fact, to keep things by the books you’ll want to hire an independent person to do any work needed on real estate that is owned by your IRA.

What About the Tax Benefits of Owning Real Estate in an IRA?

The tax benefits of owning real estate in your IRA are overstated. Like any investment in your IRA, taxable income is deferred until the day you take withdrawals, or if it is a ROTH IRA, any investment gain is tax-free. However, inside your IRA you cannot claim deductions, depreciation or a loss. In 5 Benefits of Investing in an Income Property, benefit number five is the huge tax write-offs. You don’t get those when you invest in this type of property with IRA money. Most people will be better off using non IRA money for their real estate investments.

Who Should Buy Real Estate in Their IRA?

If you are an experienced real estate investor, and you know you can earn an attractive return by buying raw land or flipping properties, and the income you earn by doing so would normally be taxed at your ordinary income tax bracket, then you are someone who may see a tax benefit from doing some of your real estate transactions with your IRA money, and you are the minority.

Finding a Custodian for Real Estate IRAs

An IRA is a type of account that that the IRS has designated as having special tax treatment, and as such, an IRA must have a custodian that keeps track of and reports on deposits, withdrawals, and year end balances.

Many custodians will allow you to open what is called a self-directed IRA and they will charge an annual or quarterly fee to provide the necessary reporting. Many of these custodians will provide literature and links to the rules that apply to owning real estate in your IRA, but most of them will not give you legal or tax advice, so it will be up to you to make sure you are following the rules. If you don’t follow the rules, you take the risk that your entire IRA account will be considered taxable income.

Equity Trust Company is one custodian I found online that offers self-directed IRAs and they provided some good links to information on Self Directed IRA Rules. Specifically Equity Trust provides details on:

You need to understand these rules inside and out before you pursue real estate investments with your IRA money.

This blog post titled Self-Directed IRAs Looking at Foreclosures provides links to additional resources on buying real estate in an IRA.

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