Investing Using an IRA

Posted by Hannah Lapin on Jan 3, 2018 9:56:06 AM


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.  Dawn Reiss of U.S. News and World Report highlights the benefits and pitfalls of investing using funds from an IRA. 

Described as "not a passive investment," Reiss 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 trustee or custodian, which is a company that can hold their assests, in the transactions.

On the other hand, for savvy, high-net-worth investors, using a self-directed IRA can serve as a tax deferment strategy. Using a Roth IRA allows investors to transfer their properties tax free for qualified distributions (a five-year holding period and the investor must be 59.5 years of age and considered disabled). Contrastly, for a traditional IRA, investors will pay taxes when the account is paid out.

Despite the tax benefits, Reiss advises that the average investor shy away from this investment strategy due to illiquidity and complicated legal restrictions from the IRS. For example, one cannot use an IRA to finance a rental property and later use the house for personal reasons. Additionally, there are guidelines regarding how properties can be repaired and how much compensation can be collected. Violating these rules can be costly, with one prohibited transaction triggering a business tax, causing the full IRA to become taxable.

One final word of advice; beware of fees. Trustees charge transaction and other fees, and with so few trustees specializing in IRAs, they often charge several hundred dollars per property. To learn more, read Reiss's full article.

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Related: How Investors Are Financing Their Rental Properties

Topics: Real Estate Investing