Using Retirement Funds to Purchase Real Estate

By: Andrew Lucas, Director of Capital Markets
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Most of the $26 trillion in U.S. retirement assets ends up in stocks, mutual funds, and exchange-traded funds.

Why? Because few investors know that the IRS allows the use of retirement funds to purchase real estate.

This can be an appealing option due to the potential for more strategic control over your retirement funds – and greater returns – than the common investment avenues.

It also allows for investors to receive tax benefits on income earned through real estate that they may not have if it was purchased with other capital.

That said, different types of retirement funds and fund administrators place varying conditions on real estate investment.

For instance, there are strict guidelines to purchases made using IRAs – and real estate is no exception. If you violate those purchase guidelines, you run the risk of invalidating the fund’s tax-deferred status and owing taxes you hadn’t previously counted on paying.

For example, one restriction placed on real estate purchased with an IRA is that the property must be purely for investment purposes – you cannot personally benefit directly (e.g., live at the property, even as a vacation home) or indirectly (e.g., hiring a family member to perform repairs).

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Further, you must pay all costs associated with the property out of the IRA and deposit all income into the IRA, and you cannot mortgage the property, or claim depreciation.

It is also important to keep in mind that you are restricted from borrowing against your IRA for purchases.

When it comes to 401(k) plans, while most employers do not offer real estate as a plan investment option, you can take loans against your 401(k) to purchase investment property for half of the value of your 401(k), up to $50,000.

Additionally, there may also be opportunities to transfer your 401(k) funds to purchase real estate.

However, if you use these funds for real estate, you cannot claim any tax protections on that acquisition, which could make that option less attractive.

Ultimately, before investing in real estate using a retirement fund of any kind, your best course of action is to contact your retirement plan administrator, who can advise you on the rules, the paperwork involved, and the repercussions and tax ramifications of choices you might make regarding those investments.

Entering into a transaction like this armed with all available information is your best bet for making a smart investment decision.

Related:Should You Buy an Investment Property with an IRA or 401k?