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INVESTORS’ CORNER: Can I use My IRA to Invest in Real Estate?

by Nasar. El-arabi

Well, the simple answer to this question is yes.

The discerning investor probably knows a thing or two about IRAs. A good deal of investors know that individual retirement accounts give you the wild card to invest in virtually all financial instruments available on the floor of the major exchange.

However, what may not be apparently clear to most is that IRAs are not just limited to the financial instruments of investment: real estate is another option.

True story.

While this seems like a very appealing investment opportunity, there are a few things that you need to take into consideration before using your IRA to invest in real estate.

You should know that not all properties are eligible as an investment option using IRAs. The property must not be a personal residence, second home or the occasional rental you may reside in. Rather it needs to be a business property.

Additionally, there is no way you can use your IRA to invest in a property that you already own. The investment has to be a new purchase directly into the IRA.

If you are considering buying a rental property, the best way to go about this is to open an IRA custodial account, fund it from an existing IRA account (and in some circumstances 401k) and then proceed to buy the real estate under the IRA account name. While you are at it, you need to exercise caution because there are rules and regulations governing what one can and cannot do while funding and managing the real estate investment.

The other consideration regards IRA investing concerns.

You see, traditional mortgages are not available using the IRA option. This essentially means that you need to have adequate funds in your IRA in order to purchase real estate properties. This is even more so if you are planning on having the property as a long-term rental.

It goes without saying that you need to factor in the costs of administering the IRA. Something else worth noting is that losses and depreciation from real estate investment cannot be written off in an IRA, which means no traditional tax savings.

Failure to comply with the guidelines will lead to the death of your IRA in addition to causing you to incur tax penalties.

Financial considerations are something else you need to factor. As the old adage goes, don’t put all your eggs in one basket. Be smart and diversify your IRA portfolio. The best way to go about this is to seek expert financial advice on the best way to diversify your investment savings into different assets while factoring in your age as well as your risk tolerance.

In conclusion, you need to fully understand what you can and cannot do when investing your IRA in real estate.

Nasar. El-arabi realestatebusters.com & nasar@realestatedoru.com, is a member of Metrolina Real Estate Investors Association, which provides education, mentoring, and networking for real estate investing in the Charlotte region. For more information, visit www.MetrolinaREIA.org.




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