Should I Use My IRA to Buy Real Estate?

Naheed AmdaniNo CommentsUncategorized

Using money from your IRA to purchase real estate has quite a few pitfalls.  Here are the risks:

  1. If you use IRA money to buy real estate, you cannot live or work on the property. There can be no “self-dealing”.
  2. You can’t physically invest your personal efforts into fixing or rehabbing the property. Even if you normally do your own construction work, you can’t do that if you used IRA funds to purchase the property.
  3. Losses from the sale of real estate are not tax deductible.
  4. Loss of rent is not deductible.
  5. You can’t claim depreciation and amortization on your tax returns.
  6. The cost of any repairs to the real estate must be paid from IRA funds. You can’t use your own money to pay for repairs.  You can’t even loan money to your IRA to pay for repairs.
  7. If you are using the property for rental purposes, you MUST hire a property manager. You can’t manage it yourself.
  8. When you reach 70.5 years of age, you MUST take required minimum distributions.  And those distributions, unfortunately, are taxed at your ordinary income tax rate.
  9. You may find it very, very difficult to get a mortgage, and even more difficult to get a mortgage with terms you find reasonable.

What happens if you break any of these rules?  Well, the penalties are steep:

  1. Your IRA loses its tax-deferred status.
  2. The value of your entire IRA becomes taxable income.
  3. If you are younger than 59.5 years old, you’re in for another big hit – an additional 10% penalty.

So if there’s so much downside, what’s the upside?  Why do people occasionally use their IRAs to purchase real estate?  Well, when you go to sell that IRA-owned real estate, the gains are not taxed.  However, there are other ways to defer taxes on real estate gains.

Also, perhaps the investor has no other choice other than to use the money in his or her IRA.  Maybe there are no other assets available.

But generally, if you can find another way to purchase real estate, go for it.  IRAs take away a lot of the flexibility and tax benefits that traditional property owners have.