How to Use an IRA to Buy Land

Most people think that the only investments allowed in an IRA are bank accounts, stock, bonds and mutual funds. This is because most IRA custodians aren't set up to manage other investment options allowed by the IRS in an IRA. Buying real estate in an IRA is legal and feasible as long as you understand the rules and follow them. It is the cost of reporting, ensuring that the rules have been followed, that most IRA custodians don't allow real estate. Don't let this stop you from truly diversifying your portfolio.

Instructions

1. Find a custodian that allows IRA real estate investments. Two of the most popular are Entrust and Pensco.

2. Open an account with the custodian you choose. Fund the account with an IRA transfer, 401(k) rollover or contribution.

3. Open an LLC and write an agreement between the LLC and your IRA. Most custodian companies that allow real estate will have template forms for you to start from. Seek the help of a tax advisor or attorney with any questions you may have regarding the relationship between the LLC and the IRA. The LLC allows the property to obtain debt and maintains the cash flow for the IRA property.

4. Open escrow on the real estate you are interested in. Make sure that the escrow company is aware that the property is to be held in your custodial IRA.

5. Fill out IRS Forms 990T and 5498 with your taxes. These forms account for the debt and expenses that the real estate property incur.

6. Keep personal assets separate from IRA assets. With real estate this is one of the biggest misunderstood components of owning property in your IRA. You cannot live in, vacation in or rent the home you are buying in your IRA. It must be an investment property. You are not allowed to perform any sweat equity in the property nor are you allowed to take an old appliance from your existing home and place it in the investment property.

Tips & Warnings

• Consult your tax advisor prior to purchasing real estate in your IRA to make sure you are complying with all IRS regulations.

References

• Investors United: Tax-Free Profits with Self-Directed IRAs
• IRS: Retirement Plan FAQs