The Basics
The rules governing allowable investments by IRAs don’t allow for an IRA's investment in life insurance, collectibles and S corporations, but just about any other type of investments is permitted, and thus the range of possible investment choices is almost unlimited. Consequently, any form of real estate can be purchased by an IRA.
Real estate IRA investing is one of many alternative investments for individuals who are knowledgeable about real estate investing or who work with knowledgeable advisors, sponsors, or brokers. Investing in real estate for your retirement may serve as a means to diversify your retirement portfolio to safeguard against the volatility and cyclical changes in the market, economy and bank and government-based investments.
For many who are experienced with real estate investing, real estate investments hold the potential to protect against the loss of principal while generating better than market rate returns through income production and capital gains. If the money being held in a real estate investment is not leveraged, both income and capital gains can flow back to IRAs tax-deferred (or tax-free if the IRA is a Roth IRA). The laws are quite simple – if you have your IRA purchase real estate from anyone other than family and pay cash for it, and you do not use the real estate for personal reasons while it is in your IRA and you solely use it as an investment, there are no special issues. If you want to leverage your IRA money, there are several guidelines that must be followed:
You cannot personally guarantee a loan for your IRA, and it may be difficult to get a bank to allow an IRA to be the debtor without a personal guarantee. It is much more advisable to ensure that the IRA has enough liquidity to support the mortgage and expenses. Generally, most custodians will have limits on the amount of leverage they will permit. In addition, your IRA will pay tax on UDFI (Unrelated Debt Financed Income), which is the income and/or capital gains attributable to the leveraged portion. (UDFI is taxed at the trust tax rate because an IRA is treated as a trust for this purpose.) Generally, these taxes are higher than would be paid on income generated from a property that you buy and finance personally. In addition, the UDFI taxes must be paid from funds from the IRA and, therefore, there has to be enough liquidity in the IRA to cover these taxes. As a consequence, although it is perfectly allowable, it may not be advisable to have an IRA hold any leveraged real estate.
Real estate IRA investing is one of many alternative investments for individuals who are knowledgeable about real estate investing or who work with knowledgeable advisors, sponsors, or brokers. Investing in real estate for your retirement may serve as a means to diversify your retirement portfolio to safeguard against the volatility and cyclical changes in the market, economy and bank and government-based investments.
For many who are experienced with real estate investing, real estate investments hold the potential to protect against the loss of principal while generating better than market rate returns through income production and capital gains. If the money being held in a real estate investment is not leveraged, both income and capital gains can flow back to IRAs tax-deferred (or tax-free if the IRA is a Roth IRA). The laws are quite simple – if you have your IRA purchase real estate from anyone other than family and pay cash for it, and you do not use the real estate for personal reasons while it is in your IRA and you solely use it as an investment, there are no special issues. If you want to leverage your IRA money, there are several guidelines that must be followed:
You cannot personally guarantee a loan for your IRA, and it may be difficult to get a bank to allow an IRA to be the debtor without a personal guarantee. It is much more advisable to ensure that the IRA has enough liquidity to support the mortgage and expenses. Generally, most custodians will have limits on the amount of leverage they will permit. In addition, your IRA will pay tax on UDFI (Unrelated Debt Financed Income), which is the income and/or capital gains attributable to the leveraged portion. (UDFI is taxed at the trust tax rate because an IRA is treated as a trust for this purpose.) Generally, these taxes are higher than would be paid on income generated from a property that you buy and finance personally. In addition, the UDFI taxes must be paid from funds from the IRA and, therefore, there has to be enough liquidity in the IRA to cover these taxes. As a consequence, although it is perfectly allowable, it may not be advisable to have an IRA hold any leveraged real estate.
