Diversifying your income can help to reduce financial hardship. One way to diversify is to buy a rental house. The income from tenants can be a source of sustainable income over years. For those with individual retirement accounts, the solution might be as obvious as withdrawing from it for the purpose of purchasing a rental house. An IRA is a collection of investments that can be purchased by anyone younger than 70½ who earns a taxable income. Using IRA funds to finance a rental property has administrative burdens, and it's important to stay within those guidelines to avoid taxes and penalties, according to the Internal Revenue Service.
Choose a self-directed IRA custodian by searching online, through the phone book or by asking recommendations of the institution holding your IRA. Custodians work with title companies and handle the purchase paperwork and manage your property.
Consult with your IRA custodian and move IRA funds to her control before purchasing a property. Your IRA custodian will be the buyer acting on your behalf. All expenses related to, and income from, the rental house will be handled by her.
Open an escrow account while due diligence and legal investigation about the property's history is being conducted. This keeps good faith and down payment money safe until the property is closed on.
Sign the purchase contract once everything has been settled and both parties are in agreement. At this point, all documents under your name pertaining to the purchase will be forwarded to your IRA custodian.
- Be sure the deed reads “for the benefit of” and your name. Otherwise, the company owns the property.
- Custodians charge for their services, from fractions of a percent to more than a percent of the portfolio value. Services and charges vary from firm to firm.
- Each IRA (traditional, Roth, SEP, simple) has different regulations regarding rental income. Confer with your IRA custodian for details on each.
- Neither the IRA holder nor a close family member can occupy the rental house until after the IRA holder has reached age 59½. At this point, taking the property as a distributed IRA asset is penalty free, and the occupancy restrictions are lifted.
- If rental income is deposited tax-deferred into the IRA, it is subject to income tax when it is withdrawn.
- Rental property can't be sold or assigned to any family member of the IRA holder until it has been distributed from the IRA account.
Lynn Starner has been writing professionally since 2004, specializing in business-related topics. She holds a both a bachelor's and a master's degree in business. She loves reading, writing, and talking about business with a particular fondness for small businesses.