Ever thought of investing in properties using an IRA? For many investors, it’s a viable option, but it can come with a price if not done correctly. U.S. News and World Report recently tackled this subject in an article highlighting the benefits and pitfalls of investing using funds from an IRA.
Described as “not a passive investment,” the author suggests that only experienced investors should buy property using an IRA. Part of the reason for this advice is the “hoops” investors have to jump through as well as the requirement for investors to use a custodian in the transaction, which is a company that can hold their assets, or a trustee.
On the other hand, for savvy, high-net worth investors, using a self-directed IRA can serve as a tax deferment strategy. In addition, using a Roth IRA allows investors to transfer their property tax free. For a traditional IRA, investors will pay taxes when the account is paid out, whereas with a Roth IRA, investors can withdraw without having to pay taxes under the condition that it is a qualified distribution (a five-year holding period and the investor must be 59.5 years of age or considered disabled).
Despite the tax benefits, the author advises that the average investor shy away from using this strategy, stating that concerns include illiquidity and following detailed laws from the IRS. For example, one cannot use an IRA for a rental and then end up using the home for personal reasons.
Also, there are guidelines regarding how the property can be repaired and how much compensation can be collected to name a few. Violating these rules can cost big, with one prohibited transaction triggering a business tax, causing the full IRA to become taxable.
One final word of advice? Take note of the fees involved with a transaction such as this. Trustees charge transaction and other fees, and with so few trustees specializing in IRAs, they often charge several hundred dollars per property. To read the full article, click here.