Passive investor? Looking for coaching? Fan of the podcast? Welcome to Life Bridge Capital!

How to Use Your IRA to Invest in Real Estate

Did you know you can use your IRA to fund a real estate investment? It’s a little-known route to passive real estate income that can be safe and savvy for the average investor, as long as it’s handled properly.

Using an IRA to Fund a Real Estate Investment

An individual retirement account (IRA) is a type of retirement savings plan that allows an individual to save for retirement with tax-free growth or on a tax-deferred basis. The United States Internal Revenue Service (IRS) gives IRAs special status in this regard.

An IRA can be used to fund a real estate investment while maintaining this special IRS status, but only if you play by the rules. When you handle it incorrectly, it could be illegal and it could have major tax consequences. This is a financial decision you must arrange carefully to avoid IRS scrutiny.

That’s why you should always seek input from a qualified financial/tax professional before making such a move. In general, abide by these basic guidelines to keep your IRA-funded real estate investment above board:

  • Don’t perform work on the property yourself. 
  • Hire an independent professional to do work on the project.
  • Don’t reside at the property or use it as a business.
  • Don’t mortgage the property.
  • Don’t claim depreciation on the property or take a loss on it.
  • Pay costs out of the IRA and deposit income into it.

Regard the property as a financial transaction rather than as something you are actively involved with. Don’t live at the property full-time or part-time. The IRS could find out and penalize you.

Some people make the mistake of using an IRA-funded property investment as a vacation home. Instead of viewing the property this way, think of it as a simple real estate investment with which you have no in-person interaction. Take a vacation elsewhere and just enjoy the growing size of your IRA!

Next, let’s look at why this strategy dovetails perfectly with real estate syndication. 

Why IRA-Funded Investment is the Perfect Match for Real Estate Syndication

Real estate syndication is a way for investors to pool their resources through a sponsor and invest in a bigger project than they could probably handle alone. The sponsor does the legwork while the investors stand back and enjoy the benefits of passive investing.

Through real estate syndication, investors reap benefits like building positive cash flow, leveraging their sponsor’s connections, minimizing investment risk, expanding their financial portfolio, and creating a plan for retirement and other goals. Investors take profits at established intervals.

Under this structure, you can invest in profitable projects like retail buildings, apartments, condo communities, and more. As the sponsor builds value for the property and the overall worth grows, your income grows too. And since your IRA is funding it, this leverages your IRA and puts it to work building value.

Syndication lines up with IRA-funded real estate investment because it maintains the proper “at arm’s length” distance that’s required under IRS rules. Consider these factors:

  • All work is done by other people.
  • You don’t live in it or use it as a business.
  • All costs and income from your investment can go back into your IRA.

This means you shouldn’t face negative consequences with the IRS. Plus, with the help of a talented real estate syndication sponsor, you can invest only in lucrative properties that yield profit rather than loss.

However, if you don’t handle the investment correctly, you may have a heavy tax burden from the IRS. For example, if you take money from the investment and deposit it in your bank account rather than putting it back into the IRA, the IRS may view your IRA as taxable income and send you a big tax bill to pay.

How to Invest in Real Estate Using Your IRA

What do you think? Is IRA-funded real estate investment right for you? When you have an IRA that’s just sitting there, not building wealth, you’re missing the opportunity to put your money to work for you.

If you’re interested in using your IRA to fund a real estate investment, contact Life Bridge Capital today to learn more about our current investment opportunities. We’ve helped many investors use this option to fund lucrative real estate projects.

Contact Whitney to Start Investing Today

A Guide to Passively Investing In Commercial Real Estate

Related Posts