Buying real estate with your IRA

Dear Steve,

Dear Eric,
Sure, you can roll over your IRA into real estate. For the most part, the IRS only prohibits an IRA from investing in life-insurance policies and collectibles such as artwork, sports memorabilia, gems and the like. So you can buy real estate in all its forms: residential, commercial, rental, raw land, trust deeds, etc., using your IRA, or a former employer's qualified retirement plan.

But going the real estate route with an IRA is not exactly an easy journey and there are some potential pitfalls.

First, you have to create what's called a self-directed IRA and you'll need a special independent "IRA custodian" that handles these matters. There are a number of trust companies, brokerages and other financial institutions that do this, including CNA Trust, Mid-Ohio Securities, Retirement Accounts Inc. and Trust Administration Services Corp, to name a few. Do a Web search for "self-directed IRA custodians" (use quotes) to find more.

Many such custodians can accommodate other investments, such as stocks and mutual funds, in the same IRA account. But their fees and services can differ drastically, so shop around. Make sure you know the rules and how well insured your plan assets are, too. Some custodians also offer rent collection, deed filing and other extras, but you may have to contract with a different firm for such services depending on which company you employ.

I have to note that you probably shouldn't buy a high-upkeep property this way. Investments in relatively static real estate such as self-storage units and pay parking lots will simplify your investment life.

There are a few other caveats. Your IRA can't buy property that's going to be used as your residence or vacation home. You can't buy or lease the property from your spouse, your parents or your children. If the property is mortgaged, most of your gains are still subject to tax. (Better see a tax pro before you do this!) Also, in an IRA format, your investment won't benefit from many of the standard property deductions.

Add these concerns to the custodian's fees, property-brokerage fees, and such a self-directed real-estate IRA may not be as beneficial as a conventionally taxed real estate investment. If you're close to retirement, or think you may need ready access soon to your IRA cache, this approach may not be for you. At the very least, you may want to hold back some of the plan's liquidity in cash, just for diversification's sake.

Good luck.

-- Posted: July 31, 2004