If you'd like to move your individual retirement account out of your current mix of stocks, bonds or other investments and purchase real estate, you can do it without paying taxes. Some types of real estate investments can be purchased in your existing IRA, while others will require you to roll your IRA over to a different type of account or even make a tax-free withdrawal.
If you have a Roth IRA and would like to invest in real estate, one option is to simply pull out the money from your account. Since you contributed taxable money to your Roth, you can pull out your original contributions tax-free whenever you want. You can't, however, pull out money that that comes from earnings without paying taxes. Given that real estate can carry its own generous tax benefits and that it can be hard to use debt on IRA-owned real estate, owning your real estate outright may be a good strategy for you.
Paper Real Estate Investments
If you want to invest in real estate without actually having to physically own it, deal with tenants and unclog toilets, you can probably do it in your existing IRA. Many IRAs let you buy whatever stocks, bonds or mutual funds you want and trade between them freely. You can buy real estate investment trusts -- which are like mutual funds that own buildings instead of shares of stocks -- in your IRA. REITs give you exposure to the real estate market and typically pay out healthy yields based on the cash flow they get from the buildings that they own. You don't get the tax benefits of real estate ownership, but since you're holding them in an IRA, you wouldn't get those benefits anyway.
Self-Directed IRA Rollover
When you want to hold actual, physical real estate, you must roll your IRA over into a self-directed IRA. In a self-directed account, you can buy just about any investment that you want, including physical real estate. While the rollover process is relatively simple, once you have your account open you will need to comply with its rules and regulations and pay custodial and other fees.
Real Estate Rules
If you open a self-directed IRA and fund it with a rollover so that you can buy real estate with it, you'll have to follow very specific IRS rules. First, you aren't allowed to "self-deal." This means that you can't get any personal benefit from your IRA's real estate, and it also can't get any benefit from you other than your annual contribution or what it can earn on its own. Your real estate will have to stand on its own with the money that accompanies it in its IRA. Second, if you want to take out a loan, you have to use a special loan where the lender cannot come after you if the loan doesn't get paid. Non-recourse loans stop with the IRA -- the most it can do is take your property -- and usually are harder to find, require more money down, and cost more than traditional loans. If you use a loan, you may have to pay tax on the profits that you earn on the amount of the property that is attributable to the loan under the IRS's unrelated business taxable income rules, usually referred to as UBTI. Because these provisions are very complicated, it's usually best to discuss them with an accountant.
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