Investing in real estate through your IRA can be a powerful way to leverage tax advantages and diversify your retirement portfolio. It’s not without its complexities, but with the right information and planning, it might be a smart move. Here’s what you should understand before using an IRA to buy investment property.
What Kind of IRA Allows Real Estate Investments
- Self-directed IRAs (SDIRAs) are required. These retirement accounts allow you to invest in alternative assets—not just stocks and bonds. Real estate is one of those alternatives.
Your IRA custodian must allow real estate holdings. Not all IRA custodians do, so make sure your custodian offers this feature.
Key Rules & Restrictions to Keep in Mind
Using an IRA to own property means you have to follow strict IRS rules. Violation can lead to losing the tax-advantaged status of your IRA.
- The property must be purely for investment use. You or any disqualified persons (like certain family members) cannot live in it, use it personally, or directly benefit in non-investment ways.
- All costs (maintenance, repairs, property taxes, insurance, etc.) must be paid from the IRA. Income from renting must flow back into the IRA. You can’t pay these with your outside funds.
- Titles must reflect that the IRA owns the property. You don’t personally own it. The legal owner is the IRA.
- The IRA can’t buy property from or sell property to you or any disqualified person. That’s called a “prohibited transaction.”
Pros (What Makes This Attractive)
- Tax-advantaged growth: Rental income and appreciation generally stay sheltered within the IRA. Depending on if it’s a Traditional or Roth IRA, your withdrawals may have different tax consequences.
- Portfolio diversification: Real estate behaves differently than stocks and bonds. Having real estate exposure can help reduce risk from market volatility.
- Control & potential reward: If you know your real estate market well, you may be able to pick high-performing properties, increasing your long-term returns.
Cons & Risks (What to Watch Out For)
- Liquidity issues: Real estate isn’t as liquid as equities—you can’t sell a property as quickly as you sell a stock.
- High entry costs: Buying property typically requires more capital than buying stocks or mutual funds. Upfront costs, down payments, closing fees, and custodial fees can add up.
- Ongoing maintenance and expenses: Repairs, property management, vacancies, unexpected problems—these can eat into returns. And you can’t dip into your personal funds to fix things. All expenses must come from the IRA.
- Complex rules to follow: Violating IRS rules (e.g., use by disqualified persons, mixing personal benefits, etc.) can lead to penalties and disqualification.
Is It Right for You?
If you’re considering real estate through your IRA, here are some questions to ask:
- Is your IRA custodian set up to handle real estate investments?
- Do you have enough capital in your IRA (or contributions available) to handle both purchase and ongoing expenses?
- Are you prepared to manage a property (or hire property management) without personally doing any of the work?
- Are you okay with less liquidity?
Will your long-term returns likely be better than other investments in your IRA (such as stocks, mutual funds, REITs)?
Bottom Line
Using an IRA to invest in real estate has potential rewards—tax advantages, diversification, and long-term growth—but it has trade-offs. It’s an opportunity best suited to investors who are comfortable navigating complex rules, handling property maintenance, and managing a less liquid investment.
If you’re interested, it’s wise to consult a tax advisor or retirement planning specialist before moving forward. Real estate is part art, part science—and part law.