As the Baby Boomer population continues to grow, the price of retirement homes in desirable locations from Arizona to the South of Spain continues to rise. Using self-directed IRAs, some investors are now purchasing these retirement dream homes well before their retirement years. Foreseeing a rise in the cost of retirement properties, most notably waterfront properties, these investors have been capitalizing on a rule in the IRS code which enables the purchase of investment real estate using funds from individual retirement accounts (IRAs) – without incurring distribution taxes or penalties.
Real estate can be purchased as an investment by your IRA, as long as the property is used as a true investment for growing your retirement account. And though you can’t live in an IRA-purchased home now, you can rent it out to non-relatives. Rental of these properties to your relatives or living in it yourself is prohibited because this would be seen as a conflict of interest. When the time comes for you to retire, you may take over ownership of the property as an IRA distribution.
Jill Jensen, a real estate broker in the greater Puget Sound area, says, “There are many advantages to purchasing waterfront and retirement property with IRA funds before retirement. These types of properties are appreciating at greater rates than traditional real estate. Buying the property now locks in today's prices while allowing for a large appreciation return on your investment." Jensen goes on to describe a situation in which one of her clients used IRA funds to purchase an investment/retirement home. Her client "makes between 7%-10% per month using his future retirement home as a vacation rental." This is a great return for most IRAs, not to mention the 10% rate at which Jensen tells us this property is appreciating every year.
According to Andy Saddler, a realtor who specializes in real estate IRA investing, retirement homes can and are being purchased with IRA funds. Saddler explains, “In this way your IRA can receive the monthly rental cash flow and gain the appreciation. When you are ready to retire, after 59 1/2, you take over the property as a distribution from your IRA by having the property appraised and paying applicable taxes on it at your current tax bracket. Upon moving into the home, you will have triggered a distribution and would normally be taxed on the full amount. One way to keep the taxes as low as possible is by making incremental assignments of a percentage of a grant deed, generally done through a title company, so you can spread out the tax payments and percentages over many years.”
There are even more advantages to this strategy if you are using a self-directed Roth IRA. Because these kinds of IRAs are taxed upfront, the property you buy would be taxed at the time of purchase based on the value of the property at that time. If you expect the property to appreciate substantially over the years between the time you buy it and the time you take it as a distribution, you could save a significant amount of money. The idea of claiming your property tax-free at the time of distribution is certainly an attractive idea to many.
Buying your dream retirement home while providing a large, secure return for your IRA is exciting news for many. It is imperative that you work with an expert in the field to set up your account – someone you can trust to help your dream of securing an ideal retirement home become a reality.
More Information: Self Directed IRA LLC & Small Business Financing
