Self Directed IRA Rental Property

Most people let a third-party manage their IRA, but this doesn't have to be the case. A self-directed IRA might not be very well known, but it is an effective way to build up a nice nest egg for a future retirement. One of the best ways to use a self-directed IRA is to purchase real estate – especially rental properties. If you're thinking about getting involved in a rental property with your self-directed IRA, then here's how to do it.

Plan on Having the Process Take Some Time

Not only do you need to find the best piece of real estate, but you'll need to make sure that all of your closing costs and down payments must come from your IRA funds. You may need to rollover other accounts into your IRA to make this possible. You'll also need to find a third-party custodian who will hold the real estate and release the funds to your title company. This can take 3-6 months easily.

You Don't Get to Take Advantage of the Investment Until You Retire

The whole purpose of investing into real estate through your IRA is that you expect the property to increase in value over time. That means you can't use the property that you purchase, live in it, or use it to pay off your mortgage. The investment aspect also means that you'll lose the depreciation deductions that a standard investor would be able to take.

There are Strict Conflict of Interest Laws in Place

If you have immediate family, a company you run, or other organizations where you have a controlling interest, then they cannot be involved with the self-directed IRA rental property. It is fine to have tenants in common and you can know who is renting the property, but you cannot have it be an immediately family member or gain direct profit outside of the IRA from those activities.

It Is Not Collateral

One of the most common mistakes made in this area is to use the real estate as collateral. Your IRA cannot be used as collateral for a loan, which means your rental property investment cannot be used either. It must be treated like any other retirement account.

You Don't Receive Any Reimbursement for Work Done

You could go out to the property and take care of it, but you'll be putting in your own time and money to do so. Any fees that are associated with the property, including HOA fees, property taxes, and even ongoing maintenance all get paid out of the self-directed IRA. All money that comes into and out of the IRA must be approved by your third-party custodian.

Income from Rental Property is Tax Deferred

All rental income and capital gains are tax deferred, so you'll be taxed at the tax bracket you are in when you reach retirement age. This can be tremendously beneficial for those who plan to be in lower tax brackets when they reach retirement age. To increase the amount of the IRA, it is also important to remember that a certain amount of contributions to an IRA are tax deductible every year.

Posted on Nov 24, 2014


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