Your IRA and Second Home Real Estate Investing

Self-directed IRAs can be used to buy real estate.

Many banks won’t deal with real estate IRAs, but it’s worth the effort to find an accommodating institution.

Real estate IRA property must be investment real estate and not a personal use second home.

Did you know?

Self-directed IRAs are a good way to fully control how your retirement funds are invested.

Did you know you can use an Individual Retirement Account (IRA) to buy investment real estate? A retirement account variation known as a self-directed IRA allows the IRA holder to put their money in a wide variety of investments such as stocks, mutual funds, bonds, T-bills and others. Real estate is included in allowable investments with a self-directed IRA. The self-directed IRA market is just getting rolling, and many banks won’t deal with a real estate IRA. If you are looking to buy a second home, it’s worth finding a bank that will accommodate a real estate IRA.

One reason banks are leery to take on real estate IRAs is they are required to act as the owner of the investment property – pay taxes, collect servicing fees, hire property management, and cover all paperwork involved with the property.

Follow the Rules

Once you establish a real estate IRA, remember, self-directed IRAs have stringent guidelines that must be met to keep the tax-free status of the account.

In the case of a real estate IRA, these guidelines include:

The real estate must be treated as an investment.

Rental profits go to the trustee.

The IRA holder cannot mange the property.

The real estate, or proceeds from its sale, remain in trust until the holder’s retirement.

If the trustee is directed to sell the real estate, the proceeds have to be reinvested in another retirement account.

Two things to keep in mind when pondering a real estate IRA to fund a second home. According to the IRS, a second home can be used by the owner for 14 days in a year, or 10% of the days rented, and still be considered an investment property, and there are no limits to the number of your IRAs. This means you aren’t limited to just a second home. Real estate IRAs can provide you a third home, or even more.