Purchasing Investment Property With Your IRA

Using your IRA (both traditional and 401-K plans) to purchase investment real estate such as a Telluride or Mountain Village, CO condo can be a wise financial move. The law states that you may purchase real estate, mortgages and other real estate-related assets so long as it is not your primary residence. Not only does this help diversify your investment portfolio, it also allows you to tap into your IRA without paying a penalty prior to retirement. The following will explain how you can purchase real estate with a self-directed IRA.

You’ll need a plan administrator/trustee to process your request

The plan administrator cannot recommend purchases but once you identify the investment, they will act on your order. Record-keeping and administration expenses may be paid directly, from separate funds, or through the plan, and may be tax deductible.

Your Telluride or Mountain Village condo is included in this type of purchase

Condos are included in the types of property you can purchase with an IRA, as are single-family homes, other multi-unit homes, apartment buildings, co-ops, commercial property and land.

How do I finance the purchase?

You can finance the property you wish to purchase using the property as collateral. However, since the property is an asset of the Plan, repayment must come from contributions to, or income from, the property or other assets in the Plan.

Important considerations to remember

It is important to remember that the entire transaction must flow through your IRA or 401-K account. The escrow must be opened by the account, not in the name of the beneficial owner. Vesting is always in the name of the account. What’s more, only qualified Plan or IRA funds may be used for good faith deposits, down payments or purchase money. If the title is vested in the individual account holder’s name, it may not be sold to the tax-deferred account.

Note: While fractional interests in real property may be purchased or sold, these interests may not be bought from beneficial owner or members of their family or business except siblings.

Initiate using a Buy or Sell Directive

To initiate the purchase or sell of real property you must use a Buy or Sell Direction Letter for Real Estate. Contact us for more information.

Note: Real property may be purchased at auction; however, you cannot purchase it with personal funds and be reimbursed later.

Additional requirements

The property you purchase with your IRA or 401-K plan becomes assets of your account. Additional requirements include the following:

• You may not personally own property which you intend to purchase with Plan funds and you must ensure that your intended purchase is not a prohibited transaction
• It must be for investment purposes only
• Neither you, your spouse, nor your family members (other than siblings) may have owned the property prior to its purchase by your Plan
• Neither you nor your family members (other than siblings) may live in or lease the property while it’s in your Plan
• Your business may not lease or be located in or on any part of the property while it’s in your Plan
• You may receive any property as a distribution from your Plan as a retirement benefit

There are strict rules for using your retirement account to purchase real estate. They include these five requirements:

1. The property has to remain in the trust until retirement.
2. It must be treated like any other investment.
3. You cannot manage the property. You can hire someone to collect the rent, do improvements and repairs, etc.
4. Any profit you receive from rent must be returned to the trustee or plan administrator.
5. You can’t use the money from your IRA to buy the home in which you plan to currently live.

So, you can see how beneficial it can be to purchase real estate – and a Telluride condo, in particular – with your tax-deferred retirement plan. Contact your professional advisors for specific details. Once you determine the benefits to purchase real estate in the Telluride and Mountain Village area, contact us for your real estate options in the Telluride area.