You can hold real estate in your IRA, but you must be careful about the restrictions.
IRAs are popular because of their flexibility. When you use an IRA, you can decide which assets you want to hold in your account. Nearly anything can be held in an IRA. While there are some exceptions to what you can put in your IRA, there is often a great deal of flexibility.
If you want true flexibility, you usually have to open a self-directed IRA. You usually have limited options when you open an IRA through a brokerage. With your self-directed IRA, you can get a little more creative — including adding real estate to your IRA.
Real Estate in Your IRA
Many investors like to add a little real estate to their portfolios in times like these. Prices and rates are low, so you can get a good deal. Plus, rents are rising, so the potential gains are also quite reasonable. And you don't even have to be much of a landlord since you aren't allowed to manage the properties you hold in an IRA. Your property has to generate enough cash flow to cover expenses if you want it in your IRA.
Restrictions on Real Estate in Your IRA
- You can't manage the properties yourself, so no writing personal checks for repairs on the property and engaging in other management activities.
- No lending money to the IRA to help cover the cost of your properties.
- No depreciation deductions are allowed on the real estate held in your IRA.
- You don't receive the preferred long-term capital gains rate on gains. When you withdraw, you will be taxed at your regular income rate (unless you have a Roth IRA, of course).
- You cannot stay in a rental property that you have in an IRA. Not even for a single night.
- You cannot buy property for your IRA from an immediate family member.
- Your IRA rental property cannot be rented to an immediate family member.
If you decide to hold real estate in your IRA, consider opening a separate account just for the real estate holdings. This way, it's easier to stay on top of what is happening with your IRA real estate investments.
Should You Add Real Estate to Your IRA?
On the other hand, you might be better off with other types of investments. It can be complicated to use a self-directed IRA to try and hold real estate. If you want to add real estate to your retirement investments, you can use REITs in IRAs that you purchase through brokers or banks. REITs allow you to get exposure to real estate without the need to buy property. Plus, REITs pay dividends, so you have a chance to build your IRA through those means.
Carefully consider your options before adding real estate to your IRA. While you can hold real estate in your IRA, there are a number of restrictions, and if you aren't careful, you could run into trouble with the IRS. You might be better off buying property for more immediate passive income purposes and sticking to REITs if you want to add real estate to your retirement portfolio.