Real Estate Investment Rules in IRA – Top 10 Do’s and Don’t’s

real estate investment rules

There are many real estate investment rules when investing with your IRA. We are here to help you every step of the way. Here are our top dos and don’ts of real estate.

DO buy real estate for investment purposes.

Adding real estate to your retirement plan is a great way to diversify your portfolio. But, you must keep in mind that it must be for investment purposes only. This means you are not able to live in it or use it as a vacation home. The IRS wants you to benefit from it at retirement, not now.

DON’T buy or sell from a disqualified third party.

Disqualified parties include you and your spouse and businesses in which you have a majority interest. Disqualified parties also include your parents, children, grandchildren, and their spouses. Your IRA fiduciary is also a disqualified party. Your siblings are not disqualified. You can sell or buy a property from your brother or sister as long as the property is bought or sold at fair market value.

DO make sure you use the proper title when putting an offer in on a property.

It is much easier to close if everything is done correctly from the beginning. The proper title should read:

Midland Trust, LLC FBO Jack Smith IRA #1234567

DON’T sign closing documents personally.

Your IRA is the owner of the property. So, your IRA administrator should sign all legal documents. Once you identify the property and your offer is accepted, fill out our real estate Purchase Authorization form. We will take care of getting in contact with the title company. We will have you review and initial all documents, but we take care of signing them.

DO have rental income sent back to your IRA.

One of the benefits of owning property in your IRA is that all income comes back to the IRA tax-free. Income should deposit into your IRA account and not into your personal bank account. Everything must flow through the IRA to be within IRS regulations.

DON’T pay for expenses personally.

Expenses, like income, must be paid by the IRA. Because the IRA is the owner of the property, it handles any and all expenses associated with the property. All bills must be paid for by your IRA and not you personally (or with a credit card). If you do pay a bill personally, the IRA is unable to reimburse you because that will look like a distribution to the IRS.

DO rent the property to a non-disqualified third party.

Remember the Disqualified Party real estate investment rule. If you decide to rent the IRA-owned property, you cannot rent it to a disqualified party (as defined above).

DON’T take personal receipt of sale proceeds.

The IRA handles signing all documents for the property’s purchase. The IRA must send funds to close. When it comes time to sell, the IRA signs all closing documents and takes receipt of the sale proceeds. If you wish to take some or all the funds out of the IRA as a distribution, you may do so after they have returned to the IRA.

DO have the IRA listed as either primary insured or additional insured on any insurance policy.

All other bills (such as water, electricity, cable) can be put in your name personally. But, insurance is the only thing that must reference the IRA. Regardless of which name it’s in, keep in mind that all bills must be paid for by the IRA.

DON’T forget about your tax bill.

While the IRA handles paying the tax bill, keep in mind that we are not property managers. It is up to you to make sure the tax bill gets paid every year. If you move, make sure to change your address with the tax collector. If you receive the bill, make sure you send it to us with authorization to pay. Make sure you have enough funds in the account to pay it.

There are a lot of things to keep in mind when you are thinking of investing in real estate with your IRA. But we are here to help you every step of the way. Remember to have fun with it and always invest in what you know best!

To learn more about real estate investment rules using an IRA, contact Midland Trust today.