Real Estate Purchase as IRA -- Anyone Done It?

annie1971November 24, 2009

I've read that real estate/second homes, etc. can be purchased as IRA accounts. The buyer cannot occupy the residence (even over night), but can rent it and treat the property as an IRA. When it's sold the proceeds can be rolled into another IRA or taken in cash with the usual tax. I'd be interested in hearing from anyone that has experience with such transactions and with tips on how to proceed.

My husband and his brother co-own their recently-deceased mother's home. They're trying to sell the property, but the house (despite the improvements we've already made) isn't selling because: 1 - the neighborhood isn't the best (it's safe and friendly, but somewhat "depressed"), 2 - there needs to be a better water source (i.e. a new well), 3 - it' has a stuck in the 80's interior. The brother doesn't want to spend any more money to get it more appealing to buyers/lenders.

I'm considering purchasing it with my IRA funds (for less than half it's market value to the brother). Put 15 to 20 thousand into it and sell it when the market is better for a decent profit. I'm willing to take the real estate risk. There wouldn't be a loan/mortgage payment, so I'm not worried about additional monthly debt. I'm just not clear how the IRA identification is established and what steps needs to be taken.

Anyone done this?

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Hi Annie,
Yes... you'd need to establish a self-directed IRA and utilise a custodian familiar with real estate transactions for such (there are plenty... use Google to find them or ask me offline... they're just not the same custodians you trade stocks with.)

You cannot "self-deal" though... so for you to buy your husband's real estate MAY be a prohibited transaction. Check with your tax advisor on that.

BTW... getting financing for investment real estate being bought and owned by a qualified plan (not an individual) can be very tough... and many folks do not have that much cash in their qualified plan to toss on the barrelhead to buy real estate....

SO.... the alternative strategy is for the IRA to buy the CONTROL of the real estate with a longterm OPTION (which can be done for a few hundred to a few thousand dollars,) then use IRA funds for the improvements... and either collect rents cashflows into the IRA... or turn around & sell the same existing OPTION to a financeable individual buyer for the profit (which, knock on wood, could be tens of thousands of dollars.. if done right, and with the wind to your back, sun on your brow, low sodium and good teeth! ;~)

Dave Donhoff
Leverage Planner

    Bookmark   November 25, 2009 at 3:19PM
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Thank you, Dave: You've given me many things to consider and prepare for. I would like to see this go forward -- I think it would be beneficial from both standpoints. Will need to cover to cover the buttocks and do it right, however! Thanks, again.

    Bookmark   November 25, 2009 at 7:05PM
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Keep in mind the custodian will want a fee, and for RE they have to handle more paper work.

While IRA type fees are rather low (it is all computerized anyway), RE requires more 'handling.'

    Bookmark   November 27, 2009 at 10:11AM
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