Purchasing Investment Properties with your IRA
IRA Association recommends using the real estate IRA when purchasing property to ensure its security. The real estate IRA can also be used for flipping homes, rental properties and other types of common investments. By following the ins and outs outlined in this article you should have no problem buying any type of real estate with your self-directed IRA money.

What is a self-directed IRA?

A self-directed IRA is an IRA in which the person holding the IRA has made all of the investment decisions for it. Most individual retirement accounts are generally managed by a custodian, but with a real estate IRA, you can gain control over your own fate and actually purchase property yourself. It's important to note that you cannot purchase a property for personal use as it is considered a prohibited transaction under the IRS code. This means you can't buy a house and let your kids live there or have it as a weekend getaway.

Why should I consider purchasing real estate with my IRA?

The best reason why you should consider buying real estate with your self-directed IRA is for security. If you purchase real estate with the use of a self-directed IRA, then it's basically like purchasing that property with cash since you can't get financing when using IRA funds. This will give you all the benefits of having an asset like real estate without putting yourself at risk if something goes wrong.

What are the tax benefits of using my IRA funds to buy real estate?

There are also tax advantages that come with buying real estate with your IRA. The interest you pay on a traditional mortgage is usually deductible, but if you use an IRA to purchase the property then the interest will go into the loan's structure and won't be taxed.

How do you buy real estate with your IRA?

There are several steps that go into buying real estate with an IRA. First, you'll need to choose between a traditional or Roth IRA when setting up the account. If you want the deduction on your taxes now then use a traditional IRA, but if you want tax-free withdrawals later on then a Roth IRA is probably better.

After choosing the type of IRA you want, you'll be ready to begin purchasing property for your account. You can purchase real estate either personally or through a checkbook-control LLC that you set up with your custodian to manage the IRA. Before doing this, however, make sure you're familiar with the laws for purchasing real estate in your state. If you're looking to purchase land, then this may be particularly important since there are certain rules that govern it.

Once you've found the property you want to buy, simply contact your IRA custodian and request a check made out to yourself for the total purchase price of the property. You'll keep this money in your IRA, but you can then use it to purchase the property free of any taxes.

If you're purchasing real estate through an LLC that you set up with your IRA custodian, then things get a little more complicated. You will have to pay the purchase price of the property through personal funds or outside checking account and then use an IRA-owned LLC to purchase the property. Once it's purchased, you'll transfer the property to the IRA-owned LLC and your title company will pay off any outstanding liens or mortgages on the property so that it's fully owned by the LLC.

As you can see, purchasing real estate with an IRA is not as difficult as it may initially sound. You'll have to do some research on the laws in your state, but if you keep everything organized and follow the proper steps, then you shouldn't have any problem buying property with an IRA.

The above article is intended to provide general information about purchasing real estate with your IRA. The IRS rules are constantly changing, so please check with your tax advisor before making any decisions.