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Investing Your IRA into Real Estate

One popular application of funds in a PENSCO self-directed IRA has been direct or indirect investments in the ultimate "hard" asset: real estate.

When it comes to real estate investing with your IRA, you can invest in property for long-term appreciation, rental income or a short-term “flip” (renovating with the aim of quickly selling at a profit). You can even benefit from real estate without owning the property itself by using self-directed IRA funds to purchase mortgage notes and trust deeds secured by real estate.

Types of Real Estate

What can I buy with a real estate IRA?

With a PENSCO self-directed IRA, you are free to invest in almost any form of real estate – from condominiums and office complexes to farm land and boat slips. You can invest in:

  • Homes, apartments and condominiums
  • Commercial properties such as retail stores, hotels and office complexes
  • Trust deed notes, mortgages and tax liens
  • Raw land and lots
  • Real estate options
  • Other types of property such as farmland, boat slips, mobile homes and timber rights

Key differences of holding real estate in an IRA

Purchasing and maintaining real estate in an IRA differs from traditional property investments in a few important ways:

  • The property’s buyer is the IRA, not the investor. That's why paperwork must flow through an IRA custodian like PENSCO.
  • All expenses and revenue must go through the IRA. Expenses must be paid by the IRA and any revenue must come into the IRA.
  • You cannot use the property for personal reasons. The property must be treated as investment, not for the immediate benefit of you, your business or your family.
  • Maintenance and repairs must be done by a third party. If the IRA owner provides any “sweat equity” activities – even something as minor as changing a light bulb — there could be significant penalties.

A Real Estate Investor

John wants his IRA to purchase a single-family home from an unrelated seller. He has plenty of money in his IRA to cover the cost of the home purchase, plus likely expenses...

So, he calls PENSCO Trust Company and, in the course of his conversation with the PENSCO real estate specialist, explains that he hopes to rent the home to his daughter at market rates.

The PENSCO representative explains to him that if the home is owned by his IRA, IRS rules prohibit him from renting the house to his daughter, but that he could rent it to a friend or sibling at market rates. John takes some time to reconsider his plan, and then enlists PENSCO’s help to go ahead with the home purchase.

Once the transaction is complete and the home is owned by John’s IRA, John enlists PENSCO’s help in depositing the tenant’s rent payments into the IRA and making all the various expense payments associated with home ownership from IRA funds, for example, property taxes, homeowner association fees, utilities, contractors used for maintenance/repair, etc. A number of years later, John decides to sell the home that is owned by his IRA. In the years during which John’s IRA owned it, the value of the home increased by 20%, net of rental income and expenses. After the home is sold, John’s IRA is worth 20% more than it was to start out, and he retains that 20% in his IRA account tax-free, at least until he decides to withdraw money from the account.