Most people who have IRA accounts have the type which is administered by a custodian—which is typically a bank or investment brokerage. Recently though, there's been more talk of self-directed IRAs that allow you to use the funds on other investment opportunities, including real estate. A self-directed plan is controlled by the client rather than the financial advisor. A self-directed IRA can be a traditional IRA, Roth IRA, Simple IRA, SEP or 401k.
Since many people have some experience in real estate investing (having bought or sold a home) they tend to have a better understanding of real estate investment as opposed to financial securities. The idea is that if you understand real estate better than the stock market, you may have a better return investing in something you understand.
The problem in the past was that it was difficult to find a custodian for the real estate. Not so much anymore. A recent Internet search of "real estate IRA" showed that there are quite a few companies offering advice about the rules, along with some online seminars.
There are strict IRS rules on investment of IRA funds. For example, there are prohibitions against purchasing properties that provide a benefit to the IRA holder or their lineal descendants. This means that you cannot purchase a property for yourself or lineal descendants to occupy or rent. The idea is that the real estate purchased is an investment owned by the IRA—which is a separate entity—and all income and expense for that property goes to the IRA. Upon the sale, the proceeds go back to the IRA. It is also possible to form a single-member or multiple-member LLC in which the IRA invests. This allows the client to control the LLC, and they can choose to perform all the administrative tasks or hire a property manager. When the property is sold, the LLC can be dissolved and funds are transferred back to the IRA. The income earned will be tax deferred or tax free, depending on the type of IRA. It can also be a great way to avoid capital gains.
The self-directed real estate IRA provides some interesting options, particularly for real estate professionals and for people who have a better understanding of real estate than the stock market. Still, it's very important to have good financial and legal advice so you can avoid getting in trouble with the IRS. This author is not a legal or financial expert, and this is not meant to provide legal or financial advice. Instead, the intent is to bring awareness to this option for those desiring to pursue real estate investment with IRA funds.
745 NE Revere, Bend, OR 97701
3 beds, 1.5 baths, 1435 square feet, .16 acre lot | Built in 1950
Listed by Home Smart Central Realty
20628 Couples Ln., Bend, OR 97702
3 beds, 2 baths, 1620 square feet, .14 acre lot | Built in 2005
Listed by Coldwell Banker Morris Real Estate
1122 NW Foxwood, Bend, OR 97703
3 beds, 4.5 baths, 5420 square feet, .56 acre lot | Built in 1991
Listed by The Hasson Company
Photos and listing info from Central Oregon Multiple Listing Service