Investing in Real Estate Through Your IRA
| Read comments | Add comment / Rate this Article | Article by: Mark Casey |
Your Individual Retirement Account (IRA) can be used for more than purchasing stocks and bonds. Section 408 of the IRS Code allows for individuals to purchase commercial real estate, non-owner occupied residential property, and raw land with funds held in your traditional IRA, Roth IRA or SEP-IRA. This is great news for someone who would like to diversify beyond the stock market, and build real estate wealth with her/his retirement account.
Setting it up. An IRA which enables you to directly purchase of real estate into your retirement account, is called Self-Directed IRA. To set one up, you will need to locate an independent IRA administrator allowing real estate investments. If your current stock broker or banker who handles your stocks and bonds does not provide Self-Directed IRA custodial services, you will need to find one who does. However, you will not need to sever any relationships. You can leave your stocks and bonds with your current advisor while you set-up your Self-Directed IRA with administrator which specializes in real estate. Fees vary depending on the scope of services provided by the administrator.
Selecting the Property. The property you select and purchase will be owned by your IRA account, not by you personally. Your Self-Directed IRA custodian will provide their guidelines for the type of real estate you can purchase. Regardless of the Self-Directed IRA administrator’s guidelines, it is important that you select a property is consistent with the goals of your retirement portfolio. Any mortgage against the property will need to be non-recourse, meaning the mortgage holder will not have access to any of the IRA holders personal assets should property not be able to service its debt.
One property option I particularly like is a debt-free tenant-in-common (TIC) interest. Because it is debt-free the issue of the lender’s recourse is moot. A TIC property is a deeded, fractional interest in a larger property, such as the medical office building pictured in this article. While the total property is valued at $1.5-Million, a fractional interest can be purchased for as little as $50,000. I like medical office buildings as an investment sector, because as the baby boomer generation continues to age, well-located, well-designed medical facilities are an excellent bet.
Advantages. This type of debt-free TIC has three advantages:
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It is professionally managed, meaning neither you nor your custodian will be called if the roof is leaking or the toilet is not working
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Because property is not mortgaged, your IRA is not exposed to interest rate risk, or the risk of losing the property in the event cash flow is interrupted due to vacancies
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High-quality investment real estate is an excellent hedge against inflation, and a tool for diversifying your retirement portfolio.
This information is not intended to replace qualified legal and/or tax advisors. Every taxpayer should review their specific transaction with their own legal and/or tax counsel.
