How do I buy real estate with my IRA? This is one of the most common questions that Midland Trust is asked. Purchasing real estate in your IRA isn’t that much different from a typical purchase of investment property. There are a few additional steps, but as one of the nation’s leading self-directed plan administrators, Midland walks you through most of them, ensures the paperwork is in order, and takes care of the transaction inside your IRA.
Below are the steps that outline how these acquisitions work:
Open a self-directed account with Midland. You can choose a traditional or Roth IRA, a SEP or SIMPLE IRA, or an individual(k). Health and educational savings plans can also be self-directed.
Once established, the account can be funded in several ways. You can make a contribution, which cannot exceed the yearly contribution limit for your plan type. You can also transfer or rollover funds from an existing retirement plan into your new self-directed account.
Next, identify the investment property that you wish to buy. Before purchasing real estate in your IRA, perform due diligence and enough research to ensure the property is a good investment and that the people you are dealing with are reputable. This is critical because you certainly don’t want to become a victim of fraud.
You must also be familiar with prohibited transactions and disqualified persons. There are certain rules that govern IRAs and understanding them will help you invest within the limits set forth by the IRS. For instance, you are not able to vacation in a property your IRA owns. Additionally, you are not able to sell a property you personally own to your IRA or purchase an investment the account owns. Your IRA may not purchase an asset from or sell an asset to any other disqualified person, either.
Disqualified persons include:
- the IRA holder and his or her spouse
- the IRA holder’s lineal descendants, ascendants and their spouses
- investment advisors and managers
- any corporation, partnership, trust, or estate in which the IRA holder has a 50 percent or greater interest
- anyone providing services to the IRA, such as the trustee or custodian
Performing a prohibited transaction can cause your account to suffer penalties, taxation, and perhaps disqualification of its tax-sheltered status. To learn more about prohibited transactions and disqualified persons, visit the Rules and Guidelines page on our website.
Titling and the Flow of Purchasing and Selling Real Estate in an IRA
When purchasing real estate in your IRA, understand that the IRA is listed as the owner on all documents. The title on the contract will read: Midland Trust, Inc. FBO (your name) IRA #xxxxx.
You must complete a Buy Direction Letter that is supplied by Midland and we work with the closing agent from that point. As the IRA owner, you are responsible for reviewing and approving all closing documents to ensure the details of the purchase are correct, but Midland signs the contract on behalf of your IRA as the buyer.
Once your asset is acquired, understand that all income and expenses associated with it must flow into and out of the IRA. You are unable to personally pay for expenses incurred by the asset and you may not personally receive monies gained by the investment. Expenses are paid with IRA funds and income is deposited directly into the account.
If you decide to sell the property, Midland provides the necessary paperwork and works with you and your title company/closing attorney to complete the transaction. As in the purchase process, Midland signs all documents on behalf of your IRA, but you are responsible for reviewing and approving them first. All proceeds from the sale are tax-sheltered and are deposited into your IRA.
The above information gives you an idea of the basics of real estate investing with your retirement funds. As a self-directed plan administrator that serves clients across the nation, Midland Trust is here to help guide you through certain elements of purchasing real estate in your IRA. However, as a self-directed account owner, you do have responsibilities of your own that must be minded to help you achieve the success you desire. For more detailed information on transaction procedures, please visit The Process page on our website—or contact us today.