Most of us usually worry about having money in the present to pay the bills we are currently faced with. However, thinking about the future and saving money for it should be a priority in everyone’s minds. You should not want to work as you reach retirement age, and you should not want to rely on family members and loved ones to live well.

One of the best ways you can save money and secure your future is by having an individual retirement account (IRA) to enhance your individual retirement plan. This particular account helps you build your investments and financial assets, including stocks, bonds, mutual and exchange-traded funds.

In addition to this, you can also use this to invest in property, under specific circumstances.

This process is not necessarily easy and straightforward, therefore it is important that you know the rules related to this. In this article, we will discuss a few things to consider if you want to use IRA money to invest in rental property.


Know The Basic Rules

As we mentioned above, using IRA money to purchase rental property is something that is not for everyone and there are certain requirements you must meet in order to do this. Any mistakes can result in serious financial hardship for you. Below are some of the rules you will need to follow when using IRA money to invest in rental property:

  • You are not allowed to mortgage the property
  • The IRA owns the property, not you
  • You must not conduct work and repairs on the property yourself – this should be done by a paid contractor
  • You need to ensure all expenses related to the property are paid out of the IRA and pay the rental and any other associated income into the IRA
  • The property should be solely used for investment purposes and you must not live there or use it for your own personal gain.


No Personal Use

When someone becomes aware they can officially invest in a rental property with IRA money, they become enthusiastic thinking they can utilize this income to pay for a vacation residence or a home they may rent out to their kids. However, the IRS rules do not allow this to happen. All investments made by your IRA will need to be carefully thought as if you were dealing with a stranger. This means you are not allowed to utilize money in your IRA account to buy or sell rental property to or from yourself or loved ones, and you are not to gain anything from the property or use it for yourself.


The Tax Benefits

Similar to any other asset you may invest with your IRA, any taxable income is delayed until the time you make a withdrawal. If it is a Roth IRA account, any profit made from the investment accrue tax-free and you can then take out this money tax-free. These guidelines apply to every type of investment retained in the account. One of the greatest advantages of property investment is depreciation, which refers to a tax deduction you are entitled to.


Who Should Buy Real Estate in Their IRA

Using IRA money to buy rental property is certainly not for everyone. The process of real estate investing can be difficult and can also lead to legal processes and financial difficulties, meaning that it is not ideal for just anyone to attempt. If you have experience in the property investment area and you are able to make a good profit by flipping properties, buying land, or amassing rental real estate, then it may seem sensible for you to use your IRA funds. Evidently, you should stop yourself from making withdrawals of income or profit until you are over 59 years old, however, inside the IRA, you are able to move gains from one project to the next without having to worry about tax.


Finding a Custodian for Real Estate IRAs

Because IRAs come with distinct tax benefits, there must be an appointed custodian to oversee reports submitted to the IRS on deposits, withdrawals, and year-end balances. When you have a custodian in place there will be an associated annual or quarterly charge to deliver the essential reporting. Numerous custodians offer literature and links to the IRS requirements and guidelines that apply to you, but the majority will not provide legal or tax advice, therefore it will be your responsibility to ensure you are following the rules. 

If you want to invest your money in an IRA account, it is essential that you know the very basics of what this entails. This page should provide you with a clear perspective on what you need to consider if you want to use IRA money to invest in rental property.