Buying Real Estate in an IRA or 401(k)

Before discussing real estate in a retirement account, why even consider real estate as a retirement investment? A quick run-through of the basic advantages of real estate investment as compared to stocks and bonds is in order.

  • Rental property is an insurable asset.

  • Proper investment yields monthly positive cash flow.

  • Rental property appreciates in value over time.

  • The investment also builds equity through paydown of the mortgage.

  • As equity accumulates, it can be used to fund other properties in some cases.

  • There are numerous tax advantages in real estate investing.

  • Using 1031 Exchange, a portfolio can grow through turnover of properties with deferral of capital gains taxes. says: “Over the last two centuries, about 90 percent of the world’s millionaires have been created by investing in real estate.”

Not Just any IRA or 401(k)

To invest in real estate in a qualified retirement account, you must open a self-directed IRA or 401(k). Not every custodial firm handles these types of accounts, so you will have to find one that does. Carefully check them out as to reputation, experience, and particularly their rental real estate investment experience. Some basic rules includei:

  • Real property that you purchase for the account must be only for investment purposes. You cannot in any way use it personally, such as for a vacation home.

  • You cannot transfer property you already own into the account in most cases.

  • You must in most cases buy the property with cash. Lenders have a problem with the restrictions on what they can do in the case of default in a retirement account. There are ways to finance a property, but income could fall into the UBTI trap; that’s Unrelated Business Taxable Income.

  • You make buy and sell decisions, but all monies must be handled by the custodian.

  • You will have higher fees involved due to the property management and other tasks that must be handled by the custodian.

  • You do not own the property, the account does; you are not the owner on the title.

The rules are strict, with all transactions going through the custodian. Any violation will usually get your account’s tax-advantaged status revoked.

The Mechanics

You do not own the property, so you cannot take advantage of any of the normal tax deductions related to real estate investmentii. This includes property taxes, insurance, and depreciation deductions. It is growing tax-free in the retirement account. On the good side, all expenses involved in property management, repairs, maintenance, etc. are paid out of the retirement account. The other side of that coin though is that those monies leave the account and cannot grow over time.

Careful selection of properties is crucial. You do not want a property that will incur large expenses for repairs or major renovations. Should your account fall to a balance below which you cannot pay the bills, you could be in a situation where you will incur penalties if you deposit excess funds to cover those expenses.

To sell a property in a self-directed retirement account, the purchase negotiations are the same as any real estate sale. However, once the contract is finalized, the custodian takes over and is the seller, takes care of the closing, and takes in the funds from the sale.

Consult with professionals before you set up a self-directed account and understand the mechanics of rental property valuation and local rental demographics.

i Using Your IRA to Buy Real Estate,

ii Code of Federal Regulations,


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