As the Baby Boomer population continues to mature, the need for final retirement homes also grow. Using self-directed IRAs, investors are now purchasing their retirement dream homes well before their retirement years. Foreseeing a rise in the cost of retirement properties, most notably waterfront properties, these investors have been capitalizing on a rule in the IRS code which enables the purchase of investment real estate using funds from individual retirement accounts (IRAs)—without incurring distribution taxes or penalties. Prohibited Transactions
Real estate can be purchased as an investment through your IRA, as long as the property is used as a true investment. And though you can not live in an IRA-purchased home now, you can rent it out to non-relatives. Rental of these properties to your relatives or living in the property yourself is prohibited because this is considered a conflict of interest. When the time comes for you to retire, you may take over ownership of the property as an IRA distribution.
There are strategies that can be used to create income so properties do not sit idle. Renting is one of these strategies. In this way your IRA can receive the monthly rental cash flow and gain the appreciation. When you are ready to retire, after 59 1/2, you take over the property as a distribution from your IRA by having the property appraised and paying applicable taxes on it at your current tax bracket, or, if you buy it using a Roth IRA, then no taxes are likely due.
There are even more advantages to this strategy if you are using a self-directed Roth IRA. Because these kinds of IRAs are taxed upfront, the property you buy would be taxed at the time of purchase based on the value of the property at that time. If you expect the property to appreciate substantially over the years between the time you buy it and the time you take it as a distribution, you could save a significant amount of money. The idea of claiming your property tax-free at the time of distribution is certainly an attractive idea to many.
Buying your dream retirement home, while providing a large, secure return for your IRA, is exciting news for many. It is imperative that you work with an expert in the field to set up your account—someone you can trust to help your dream of securing an ideal retirement home become a reality.
Retire on Real Estate Book | Self Directed IRA Real Estate Fidelity