The U.S. homeownership rate, which was over 69 percent at the height of the housing bubble, had fallen by the beginning of 2015 all the way to 63.7 percent. That means over the last 10 years that the U.S. has lost all of the homeownership gains of the previous 20 years. It means that the 2010 decade is on pace to be the strongest decade for renter growth in history (source: www.chicagotribune.com). That steep drop has put the national homeownership rate back where it last was in 1993. Effectively, 1.7 million fewer households owned their homes by 2015 than they did at the bubble’s peak. Many people are now thinking about buying a rental property, but may be short the cash to do it. One of the questions that we are often asked is “Can I use my IRA to buy a rental property?”
The short answer is yes, but let me first give a little ‘buyer beware’ that Real Estate IRA is extremely tricky and you must have the right financial advisor, CPA, and custodial company to even consider this strategy as part of your retirement plan. Remember, that this will not be a common recommendation from financial advisors because in general, they won’t make any money if you buy a piece of real estate within your IRA. You should really be a skilled real estate investor, whether it be residential or commercial property, to even consider this as an idea for your IRA or Roth IRA account.
Whenever you own an IRA account, most custodians will allow for common type investments included stocks, bonds, ETF’s, mutual funds, CD’s, etc. Some custodians allow for what is called a ‘Self-Directed IRA’ where you can buy certain assets such as raw land, a mobile home, residential real estate, or commercial real estate.
If you choose to go this route there are a few rules you should be aware of as it pertains to what real estate you can actually own in this IRA because it is tricky. First off, you can’t purchase a property you currently own. The real key part of the real estate IRA is that you cannot receive indirect benefits or, in layman terms, benefits that you receive today. So, you cannot own a primary residence, a vacation property you occasionally use, or a place that you rent. All of those types of decisions could put you in a scenario where this could be considered a prohibited transaction.
You can buy a rental property within the IRA, but all and any expenses must remain within the IRA, so you will want to make sure you have enough cash for home improvements and annual maintenance expenses for the property. It’s not impossible to borrow money when you finance properties, but in my experience, it becomes doubly tricky if you go this route because you could be subject to something called Unrelated Business Income Tax, which can cause additional complications for your financial picture.
The good news is that if all the steps are done correctly with a Real Estate IRA, you can have an asset that will grow tax-deferred within your IRA and eventually when you sell the property there will be no capital gains tax because the asset is within your IRA. Eventually, you will have to pay regular income tax if you buy this with a Rollover IRA, for example, but you would not if it was a Roth IRA.
Is a Real Estate IRA right for you? This can be a challenging decision so do your planning wisely to make sure that you don’t get evicted from your IRA!
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Ted Jenkin is a frequent guest columnist for the Wall Street Journal and Headline News Weekend Express. He is the co-CEO of oXYGen Financial. You can follow him on LinkedIn @ www.linkedin.com/in/theceoadvisor or on Twitter @tedjenkin.