How to Start a Real Estate IRA

Rental properties are allowed in IRAs, but personal residences are not.

A real estate IRA is an investment structure allowing investment real estate ownership in IRA accounts. These types of IRAs are not as common as brokerage or bank IRAs because of the increased administrative burden required of the custodians by the Internal Revenue Service. While real estate IRAs have more regulations than other IRAs, investors may find added diversification by purchasing real estate for retirement.

Instructions

1. Open an IRA account at a custodian that allows real estate investments. The IRS does not mandate custodians to offer all investments. Ask a tax adviser or real estate professional for referrals of real estate IRA custodians.

2. Set up a limited liability company with the secretary of state where you reside. The LLC partners with the IRA to maintain any mortgages and account for all business expenses. An IRA on its own is prohibited from being leveraged in any way so the LLC partnership becomes leveraged.

3. Write a partnership agreement between the LLC and the IRA. Most real estate IRA custodians are well versed with these and have a set of templates that you can use or modify. If you are unsure how to write the partnership agreement, hire an attorney to assist you.

4. Fund the IRA with annual contributions or through an IRA rollover or transfer. Rolling or transferring money allows you to access larger amounts of money compared to the 2010 maximum annual contribution of $5,000.

5. Find an investment property you want to purchase in the IRA. Make an offer and open escrow with the IRA as the deed owner and the LLC as the mortgage holder.

Tips & Warnings

• You are not allowed to use the IRA property for any personal benefit. This includes living in it, vacationing there, using sweat equity to upgrade or maintain it, or lease it to a business you own. Not only are you prohibited from these actions, but your spouse, children and grandchildren are prohibited as well.

• Conducting prohibited transactions in the IRA result in the IRA status being revoked on the account. All assets are deemed distributed, with taxes and penalties applied to the entire balance.

References

• IRS: Publication 590 IRAs (Prohibited Transactions)
• IRS: Retirement Plans FAQs regarding IRAs
• Fairmark: Real Estate in Your IRA