You can use your IRA to buy real estate, but be careful, there are strict rules
Using a self-directed IRA to purchase real estate is a little known trick which is vastly unused by the ordinary investor, if only because few ordinary investors would consider themselves qualified enough to make investment decisions on behalf of their own Individual Retirement Accounts. Most IRAs allow account holders to choose from a bevy of sub-accounts. This selection does not include real estate.
With a self-directed IRA managed by a custodian who allows real estate investments, an investor has the option of directing the custodian to invest in specific properties using the funds in the IRA. This is, of course, regulated very strictly by the IRS, and the investor and his family are prohibited from using the property for purposes of accommodation, rest, relaxation or leasing it to your own business. Further, you are not allowed to purchase property owned by your spouse, parents or children. Property owned by siblings, however, is permissible.
The management fee charged by custodians varies depending upon the nature and scope of services provided. Since the property title resides with the custodian, it is more convenient to have them manage all financial issues associated with the property, such as collecting rental and paying taxes and bills. The management fees charged will, therefore, vary depending on whether or not the custodian is required to handle these issues.
It is also possible to sell property held by your IRA, in which case the proceeds would go directly into the IRA. If you offer seller financing, the payments made by the buyer will go directly to the IRA. This is where the real benefit of making real estate investments through an IRA kicks in. The money is considered as earnings for the IRA, and thus receives the same tax benefits which any other IRA investment would receive.
Thus, by making use of a self-directed IRA to purchase and sell real estate, you have a narrow loophole through which you avoid being hit by property taxes. If you have a self-directed Roth IRA, then you won’t have to pay withdrawal taxes in the distribution stage based on the appreciated value of the real estate. By combining the tax benefits of an IRA with the appreciated value of the property, an investor may get the best of both worlds.
Please bear in mind that making investment decisions for a self-directed IRA needs a lot of study to make sure you are aware of all the regulations, as also the possible risks of making investments based on your judgment, rather than that of your broker.