Yes, you can own real estate in an IRA, but should you?

Yes, you can own real estate in an IRA, but should you?

How to buy real estate in an IRA

It is actually relatively easy to buy real estate in an IRA.Β  The main step required is to rollover your IRA balance from your old 401k plan or IRA custodian to a “self-directed IRA” with a custodian that focuses on the administration and compliance of self-directed IRAs.Β  Then, the money in that IRA becomes available to buy a property the same way as one would from a trust or corporate account: in the name of the IRA.

I am surprised how often I am asked about to invest in gold, private businesses, hedge funds, or real estate in an IRA.Β  Although there are tax-deferral advantages, real estate is already offers so many US tax advantages that I believe more investors are asking because of liquidity rather than tax or risk/return reasons.

Update: Michael Kitces recently shared this article highlighting more of the challenges with owning physical real estate in an IRA.

Restrictions and Disadvantages

Although I above made the mechanics of buying real estate in an IRA seem as simple as with a trust or LLC, there are several restrictions to be aware of, known as “prohibited transactions” in terms of the Employee Retirement Income Security Act of 1974 (ERISA).Β  Basically, these restrictions block many of what some savers would like to do, mainly:

  1. Neither you nor any “disqualified person” (your spouse, parents/ancestors, children/descendants, or IRA service provider) can live in the property
  2. The IRA can only finance/mortgage the property on a “non-recourse” basis, and any such leverage is subject to UBTIΒ (IRS site on UBTI)

Does it still make sense to buy real estate in an IRA?

As part of an overall asset allocation, it is often said you should own your tax-efficient assets in taxable accounts, and tax-inefficient assets in IRA and other tax-deferred accounts.Β  Real estate investing already offers US taxable investors write-offs for depreciation, interest (if there’s a mortgage), operating expenses and property taxes, and the ability to defer taxes with a 1031 exchange, which few other taxable investments qualify for.Β  To me, this makes buying physical real estate in an IRA relatively unattractive compared with keeping my property outside my IRA, and allocating my IRA to REITs (if I still want real estate exposure and the maximum shelter from non-qualified dividends), high yield bonds and stocks, and investments that require more short-term rebalancing (e.g. momentum factor funds).

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