While most people understand that real estate is an investment, many people are taking advantage of the qualified retirement accounts to purchase real estate as an appreciating or revenue-generating instrument like IRAs.
It’s really important to understand the tax implications, legal ramifications, and various other intricacies of purchasing Fort Myers real estate within your IRA.
So, let’s dive into some tips on buying real estate with your IRA in Fort Myers FLORIDA!
Tips on Buying Real Estate With Your IRA in Fort Myers
If you don’t have a self-directed type IRA… first off… you’ll need to connect with your trusted financial advisor to find a reputable and low fee self-directed IRA. Or, connect with us and we can direct you to some very good self-directed IRA companies we’ve worked with in the past.
Open a Self-Directed IRA
The first step for purchasing investment properties in Fort Myers within your IRA is to open a self-directed IRA. This type of IRA gives you more control over your retirement investments compared to a traditional IRA. With a traditional IRA, your investment options are limited to stocks, bonds, and mutual funds. A self-directed IRA, however, allows you to invest in alternative assets like real estate, which can be a great way to diversify your portfolio and potentially achieve higher returns.
To open a self-directed IRA, you’ll need to choose a qualified financial advisor or custodian to hold your IRA assets. A custodian is a trusted institution that acts as the legal owner of the assets in your IRA. There are different types of custodians, so it’s important to choose one that specializes in self-directed IRAs and has experience with real estate investments. A fee-only financial advisor can be a good option as they are fiduciaries who are required to act in your best interest. They will charge you a flat fee for setting up your account and won’t try to pressure you into specific investments since they don’t earn commissions.
Types of Properties You Can Buy With Your IRA and Rules
You can own a wide variety of properties within your IRA, including residential, commercial, and industrial structures, as well as unused land. Many savvy investors choose to purchase parking lots, storage unit facilities, and other types of property that require little maintenance but generate steady income.
IRAs offer tax advantages for retirement savings, but there are limitations on what they can hold. One key restriction is that an IRA cannot own a property you intend to use personally. This applies to both primary residences and vacation homes. The IRS strictly prohibits any overnight stays by you or your close family members, including spouse, children, parents, and grandparents.
This restriction extends beyond simply living in the property. Even attempting to skirt the rule by “renting” the home from your IRA or renting it to close family won’t work. Similarly, using IRA funds to buy a property from close relatives is also prohibited. These limitations are in place to prevent “self-dealing,” which involves using retirement funds for personal gain.
There are, however, some workarounds. For instance, an IRA can purchase a property that’s rented out to unrelated parties like siblings, cousins, or friends. This way, the property generates rental income that benefits your retirement savings, and you can potentially move into the property yourself after you retire. This strategy allows you to leverage your IRA for real estate investment while complying with IRA ownership rules.
How Does Income Work With Real Estate In An IRA?
The income generated in your IRA may not be used for your “personal current benefit.” This means that all income generated by the property must remain within the IRA until you retire. Selling the property will require you to leave all profits within your IRA. Also, property taxes, insurance, improvements, and other costs associated with the property must be paid by the IRA. Failure to comply with these regulations could disqualify your IRA, subjecting you to income taxes on the entire value of the property, plus a 10% early distribution penalty.
It’s important the all distribution rules associated with an IRA (or Roth IRA) including taxation, required minimum distributions, beneficiaries, and other factors do not change when using a self-directed IRA to purchase a property. There can be a huge upside to real estate in your IRA, but it’s best to know exactly what’s in store.