Self-Directed IRAs for Real Estate | Kathy Overfelt and Tony Overfelt

Self-Directed IRAs for Investing in Real Estate

Many people tolerate having their IRAs (Individual Retirement Accounts) locked into low-interest bearing CDs, bonds and/or stock mutual funds since these are what banks and brokerage offices typically offer. CDs aren’t paying much interest these days. Although the stock market has done well over the last 10 years, investors may want to consider cashing out and moving their money into a more tangible asset like real estate.

Self-directed IRAs (both traditional and Roth IRAs) have recently become popular vehicles for small (and not so small) investors to diversify their assets and acquire real estate for retirement purposes. Self-directed IRAs have the same annual contribution limits and tax advantages that normal IRAs possess but have some additional rules and considerations for alternative assets like real estate.

For example, the IRS requires that self-directed IRA investments be administered through a passive 3rd party. IRA Innovations LLC is a self-directed IRA account administrator located in Birmingham, AL. Learn more about their services by clicking here. 

Self-directed IRAs can NOT invest in collectibles (e.g., artwork, antiques, gemstones, stamps).  Since IRAs are established to provide for retirement benefits, you can NOT use your self-directed IRA for immediate personal benefit. Examples of such prohibited self-dealing transactions are:

  • Borrowing money from your IRA
  • Selling property you already own to your IRA
  • Using your IRA as security for a loan
  • Personally guaranteeing a loan associated with your IRA
  • Buying property for personal use with your IRA
  • Doing improvements yourself on real estate owned by your IRA
  • Staying in vacation property that your IRA owns

In addition, self-directed IRAs can NOT do business with disqualified persons. Disqualified persons are people that are not at ‘arm’s length’ from the IRA. Examples include the self-directed IRA owner’s fiduciary and members of his or her family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant). The siblings, cousins, aunts and uncles of an IRA owner are not ancestors nor are they lineal descendants and these relatives can do business with the IRA.

The rules must be followed rigorously since engaging in a prohibited transaction or doing business with a disqualified person can strip away the tax deferral of the IRA account and make the event immediately taxable. If the total value of the IRA is more than the basis in the IRA, the IRA owner will have that taxable gain includible in his or her income of that year.

Kathy and Tony Overfelt have personal experience with purchasing real estate in a self-directed IRA and would be happy to discuss that experience with you. Contact us today to arrange a personal consultation by clicking here.