How to Buy Real Estate in a SEP IRA

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Self-Employed Pension Individual Retirement Accounts (SEP IRAs) can be used to invest in real estate. There are several ways in which this can be done. The most obvious is with specific properties. However, Real Estate Investment Trusts (REITs) and Exchange Traded Funds (ETFs) also are options for SEP IRA holders who want exposure to real estate. Moreover, in many instances REITs and ETFs provide a superior option because they diversify some of the risk associated with owning a specific parcel.

SEP IRA Investments in Real Estate

  • Consider using ETFs. ETFs represent a collection of multiple investments, often tied to a index of some form. ETFs exist that focus on real estate indices and therefore hold assets that are directly linked to real estate. These may include a combination of stocks related to building, housing, REITs and real estate. Because ETFs generally mimic indices rather than relying on analyst research, the fees associated ETFs tend to be very low.

  • Evaluate REITs. REITs are collections of funds used to buy and operate a portfolio of real estate. This might include commercial buildings like office space, unimproved land like forests, residential buildings, etc. Federal regulations require REITs to pay at least 90 percent of its profits in dividends to investors; so the yield on these investments is often high. These dividends are tax-free while they are held within the SEP IRA account.

  • Research buying specific parcels. SEP IRAs allow for the purchase of specific parcels of land. Shopping for these parcels is no different from shopping for real estate held for investment purposes outside of a retirement account. However, retirement accounts, including SEP IRAs, may not be used to buy properties for the benefits of others close to you. For example, the SEP IRA cannot buy a house for your child. Before buying a specific parcel, it is advisable to talk to an expert to assure that there is no conflict with this rule.

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