Individual Retirement Account (IRA)
Definition and meaning of Individual Retirement Account (IRA) in real estate.
An Individual Retirement Account is a tax-advantaged account designed to help individuals save for retirement, which can also be structured to invest directly in real estate. While traditional IRAs typically hold stocks and bonds, a specialized self-directed IRA allows investors to buy physical properties, mortgages, or real estate partnerships.
In more detail
Investing in real estate through an IRA requires strict adherence to Internal Revenue Service regulations. For instance, the IRA must own the property, and all income and expenses must flow directly through the account rather than the owner's personal bank account. The investor cannot live in the property, use it as a vacation home, or perform physical maintenance work themselves.
Failing to follow these rules can result in the disqualification of the account, leading to heavy taxes and penalties. Despite these restrictions, using an IRA for real estate allows investors to grow their rental income and capital gains tax-deferred or tax-free, depending on the type of account.
Key facts
| Category | Real Estate Investing |
|---|---|
| Common types | Traditional IRA, Roth IRA, and Self-Directed IRA |
| Required for real estate | A specialized custodian to hold and administer a self-directed account |
| Watch out for | Prohibited transactions, such as personal use of the property or self-dealing |
An investor uses a self-directed IRA to purchase a residential rental home, ensuring all rent checks are deposited directly into the IRA account to maintain its tax-deferred status.
Frequently asked questions
Can I use a mortgage to buy real estate inside an IRA?
Yes, but it must be a non-recourse loan, meaning the lender cannot pursue the investor's personal assets or other IRA funds if default occurs.
Can I live in a house owned by my self-directed IRA?
No, IRS rules strictly prohibit you or any immediate family members from living in or using a property owned by your IRA.