5 Things to Know About Investing in Real Estate with a Self-Directed IRA | Trust Company of America - Millennium Trust Company

5 Things to Know About Investing in Real Estate with a Self-Directed IRA

April 27, 2021
By Millennium Trust
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As investors seek out new methods of diversification, alternative investments, like real estate, may be at the forefront of more investor-advisor conversations.

In addition to real estate investments providing an array of options, one of the “best kept secrets” in the industry is that you can invest with a self-directed IRA.

In this article, we break down the top five things to know when buying real estate with an IRA.

  1. There are many choices when it comes to real estate investing.
  2. What is going to happen in the real estate world post-COVID? According to PwC's 2021 “Emerging Trends in Real Estate” report, “Industrial properties, data centers and single-family homes are expected to rise in value, while retail and hospitality will see the largest decline.”

    The good thing is, you have a variety of options when investing in real estate in a self-directed IRA. Some investors invest in one or more types. Keep in mind the prohibited transaction rules discussed below.

    Real estate investment types include:

  • Direct ownership of a property (that is not personally used for business or to live in)
    • Commercial or residential rentals
    • Undeveloped land
    • Farmland
  • Indirect
    • Real Estate Investment Trusts (REITs)
    • LLCs that invest solely in real estate

2. Investing in real estate with a self-directed IRA provides several benefits.

  • Potential tax-deferred growth. Like with other investments in a self-directed IRA, the most significant advantage is the opportunity for tax-deferred growth. When you hold real estate in an IRA, income flowing into the account is tax-deferred until you take a distribution. While there are certain regulations associated with holding real estate in an IRA, investing through your IRA can yield higher returns.
  • Protection against economic fluctuation. Real estate has a low correlation with other asset classes, so when the stock market is down, real estate can continue to thrive, making it a valuable diversification tool.
  • Tax advantages. As a Roth or traditional IRA, the income in the IRA is tax deferred.

3. It’s critical to be educated on the nuances.

An individual investing in real estate in an IRA must understand that there are certain prohibited transactions between the account owner, as well as any other disqualified persons.

Examples of potential prohibited transactions include, but are not limited to, personally living, using or working on the property, renting or selling to a close relative and paying for expenses or property taxes with your personal funds (see Internal Revenue Code Section 4975).

Investors are encouraged to consult with tax and legal advisors to ensure the transaction does not violate any of the prohibited transaction rules.

4. Be aware of the risks and additional considerations.

Like with any investment, it’s important to do your due diligence. From researching the current real estate market trends to analyzing the likelihood for future area growth and increases in property value, it is solely your responsibility to ensure that the investment is sound.

Just as it is often a poor strategy to put all your investment dollars into only one stock, it can similarly be a poor investment strategy to own multiple versions of the same type of real estate. Lack of diversification can exist within an asset class.

Lastly, make sure there’s enough cash in your account to cover the real estate expenses. All income and expenses associated with the property must flow through the IRA.

5. Your team of experts is the foundation to your success.

Be sure to build a team of experienced professionals. In addition to your custodian, this often includes a realtor, lender, financial advisor, CPA and attorney.

As part of a diversified retirement portfolio, real estate can have many benefits – so long as you work with experienced professionals and understand the rules and regulations.

Millennium Trust’s team of client service experts can help you navigate this complex landscape and work with you to help you achieve your retirement goals.

Learn More

View our Real Estate Guide.

The material in this blog is presented for informational purposes only and does not constitute investment, legal or tax advice. Millennium Trust Company performs the duties of a directed custodian, and as such does not offer or sell investments or provide investment, legal or tax advice.

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