Using your Individual Retirement Account or IRA to purchase real estate has recently been a hot topic in the world of tax. However, there are so many misconceptions that surround it that can cost you thousands in tax payments when overlooked. Tax deferral is one of the biggest benefits of buying a house with an IRA. But to benefit from it, you need to know the facts first to avoid any legal or tax mistake. Read on to learn some dos and don’ts when it comes buying real estate with IRA.

For over 30 years now, buying real estate with an IRA is legal. When buying with an IRA, you do not directly buy the real estate; it is your IRA account that purchases it. Thus, to pay for your purchase, an authorization and invoice needs verification from the custodian of your IRA. This individual, then, releases the funds for purchase. Do not pull the money out of your IRA to pay for real estate. The government taxes this kind of withdrawal as ordinary income, as a contribution to your IRA.

Where to START?

When choosing a custodial for your IRA, take your pick from about one dozen major custodians offering self-directed IRAs that are able to hold alternate, non-traded investments such as real estate. Pick a big, established custodian that has had a history of following the rules. Additionally, pick someone who can give you all the information required for your transaction. Do not go with a start-up custodial that only specializes in one kind of investment. Moreover, avoid someone who works off-shore. These kinds of accounts avoid the United States regulations.

 

It is possible to purchase foreign real estate using your IRA, but many foreign countries will not consider your IRA a separate legal entity. Therefore, your IRA cannot purchase the real estate. Your IRA has to own an intermediary entity that is recognized by the foreign government. Look for a reputable legal and tax professionals to work with you, particularly those who are familiar with IRA and real estate regulations of foreign countries. Do not attempt to do things yourself.

The real estate that you bought with your IRA can only be used as a tax-deferral and investment entity. Expenses, rental incomes and any gains from a sale can allow you to defer the due tax until you take the money from your IRA. Thus, do use the property for rentals, giving you income and capital growth. Do not use it the property personally or many any repairs to it, including your family members. These “self-dealing” actions are prohibited and your investment will be made taxable.

Buying a house with your IRA can be a tricky process, especially if it is your first time to do so. Get help by hiring a reputable real estate expert like RL Real Estate Group. Regan Laughlin and her team can guide you through the process of buying a house, and even do all the searching and paperwork, so all you really need to do is sign on the dotted line. Contact them now at 605-212-8431 or regan@rlrealestategroup.com.

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