You may be wondering what exactly is involved in a real estate IRA. Actually, a real estate IRA is a type of real estate investment in a self directed IRA or 401(k). Self directed IRAs were created in order to create an alternative retirement plan to conventional IRAs that typically uses things such as stocks and bonds. (It’s important to note that many types of self directed retirement accounts still invest in stocks, bonds, or CDs.)
The real estate IRA is just one of many types of investments that the investor may decide to invest in when self directing retirement funds. This type of real estate investment can be explored in a variety of ways such as mortgages, tax liens, or investment properties.
As long as you aren’t breaking any of the rules or regulations set forth by the IRS, it’s more than likely a viable investment in real estate.
Nevertheless, always make sure that you are working with a trustee or custodian that will answer any questions about rules and regulations of your retirement plan. They are there to help ensure that all of the administrative work is completed accurately and lawfully.
But What Can’t I Do with My Real Estate IRA?
If you are wondering what you shouldn’t do in order to stay in the lines with a realty investment for a retirement plan, you are on the right track. The thing is that you are mostly regulated by what you can’t do.
Here’s where some very important factors come in. Let’s say that you have a beautiful vacation home on a lake in Montana. Maybe yo u also invested in a beachfront property in Miami where property is undervalued and you finally got a great deal on a luxury home in Vegas for a quarter of the price it would take to build it. These are all great investments.
In fact, you may want to take advantage of some of these vacation spots when they are empty. If you decided to stay or any member of your family to stay there for a while, you will risk having your IRA heavily penalized and possibly disqualified. So, don’t do it.
Who is Considered a Disqualified Person?
You or any member of your family is considered a disqualified person. This includes spouses, children, great grandchildren, parents, grandparents, and great grandparents. Basically, anyone that may have undue influence on your investment funds may not use the properties for personal use. This would be considered self dealing.
Interestingly, the IRS doesn’t mention anything about siblings or aunts and uncles; however, it a good idea to keep any transaction between a willing seller and a willing buyer that wouldn’t be subject to gratuitous influence.
Know the Basics and Ask Questions about Real Estate IRAs
Analysts report that the real estate market has leveled out and the prices are bouncing along the bottom. The market is predicted to start increasing in value by 2012.
In a recent interview at Equity University with Equity Trust CEO Jeff Desich, he reports, “Compared to last year, clients have purchased 25% more real estate…All you see is how bad investments, stocks, and IRAs were doing, but earlier this summer , real estate purchases and tax liens went off the chart.”
As a result, a lot more questions are being asked about a real estate IRA versus a traditional IRA. Always do your research and be prepared to ask lots of questions. Your custodian is not there to tell you what would be a good investment, but they are there to tell you what you have to do to follow all the rules and regulations set forth by the IRS.