It's perfectly legal to have your IRA buy and sell real estate, but most banks and brokerages don't want to bother with it. If you want your IRA buying real estate, or anything outside the brokerage's regular investment menu, you need a self-directed IRA. Like the name says, you get to pick the investments, including real estate.
Your real estate IRA is self-directed, not self-managed. You still need a custodian or trustee to handle the account and buy real estate for you. Many custodians aren't keen on running self-directed IRAs, so you need to find one who's game. You can talk to your financial advisers or search online for professionals willing to take you on. There are scam artists out there, so research candidates carefully and then interview them to confirm they're willing to work with you and your goals.
Once you find an administrator, he can help you set up and open the account. You can contribute up to the IRS annual limit -- $5,500 for investors under 50, as of 2013 -- less contributions to other IRAs. If you already have an IRA, you can have that trustee transfer money to your self-directed IRA, building up your investment fund faster. If you already have a healthy IRA portfolio, it's easier to divert some of your money into real estate than if you're just starting out.
Once you have the money, you hunt for real estate investments and direct your custodian to buy the ones you want. Some custodians will help you make a selection; others leave you to do the research. The custodian takes title to the property in your name and invests income from the property as you direct her to. If the property requires a manager -- an apartment building, for instance -- you have to hire someone for the job.
The one thing to avoid at all costs is self-dealing. Having your IRA buy your house or your rental property or letting a family member use real estate in your IRA is a big no-no, as is using your non-IRA money to pay for IRA purchases. If the IRS catches you self-dealing, it can turn your IRA into a regular account. In that case, the entire IRA becomes taxable income.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.