Invest Your IRA in Real Estate?

Success stories prove you can. But it's not for the faint of heart.

By Mary Beth Franklin, Senior Editor

From Kiplinger's Personal Finance magazine, March 2005

Painful memories of the bear market and continued frustration over low interest rates have a lot of investors looking beyond stocks, bonds and mutual funds for their retirement savings. A small but growing number have discovered they can use the money in their IRAs to buy real estate -- from raw land to single-family homes to commercial buildings.

But just because you can doesn't mean you should, warns IRA expert Ed Slott of Rockville Centre, N.Y. The rules are complex, and the stakes for running afoul of them are high. A misstep can disqualify your IRA's tax-deferred status, forcing you to pay tax on its full value plus penalties if you're under age 59½. If you want to invest in real estate in your IRA, Slott suggests real estate investment trusts.

Tax expert and author Kaye Thomas in Lisle, Ill., agrees. He notes that owning property inside an IRA forfeits the traditional tax advantages of investing in real estate. "You can't deduct property taxes or mortgage interest, and you can't use depreciation," says Thomas. "When you sell the property, a traditional IRA turns profit into ordinary income rather than capital gains" (with a Roth IRA, profit would be tax-free).

Plus, your IRA must have enough spare cash to pay such property-related expenses as maintenance costs, taxes and management fees because all income must flow into the IRA and all expenses be paid out of it.

Do your homework

Still, there are plenty of success stories. If they intrigue you, be prepared for a lot of work. First, you have to find a property you want (you can't use your IRA to purchase your own residence or vacation place). Then you have to find an IRA custodian that allows real estate investments. Don't look to your local bank or mutual fund company for help -- there are only a handful of IRA custodians who do this. You can find them by searching for "real estate IRA" or "self-directed IRA" on the Web.

That's how Eddie Gant of Houston found Entrust Administration (www.iraplus.com). He transferred his $150,000 IRA from his brokerage account to Entrust last April and used $62,000 to purchase a run-down single-family home. He spent $16,000 to remodel the house and sold it within the year for $98,000. The remodeling costs came out of Gant's IRA; the profit went back in. He has since purchased three other houses with cash and estimates a minimum 50% return within one year. But Gant, 43, has a big advantage over most of us. He is a professional home remodeler.

1 |
• 2
• NEXT >

• Print
• Comments
• Email
• RSS