Part 2: Investing in Real Estate Using Retirement Plan Funds

Posted by Duane Duggan on Wednesday, April 4th, 2018 at 11:44am.

Retirement plans such as IRAs, SEPs, and 401ks are often thought of as limited to investments in stocks or mutual funds. However, if you open a self-directed IRA account (SDIRA), your retirement plan can hold real estate as well as real-estate related investments.   

In my previous article, I introduced an overview of a SDIRA and its requirements. In this article, I will explain more details and the process for purchasing real estate in your SDIRA.

Keep in mind that finding a qualified Realtor can give you a significant advantage as you walk though this alternative real estate acquisition strategy. A Realtor has the knowledge and expertise to make these key financial investments move more smoothly.

Taking the next step 

In my previous article, I discussed the purchase of a house with your retirement plan. If you would like to take the next step and think longer term, you could consider buying a larger building. For example, if you sold the house that you invested in through your retirement plan for $600,000, you would pay no tax and you could use those funds as a down payment on a multi-unit apartment building. To buy the multi-unit apartment building, you would need to spend $1,200,000. With the $600,000 from the sale of the house, you would need to get a loan for $600,000. Any cash flow after paying the mortgage payment and expenses, would remain in the plan. You would need to direct your custodian or plan administrator as to where to invest the cash.

Unrelated Business Income Tax (UBIT)

The profit attributed to equity grows tax free, but the profit due to borrowed money is taxed as Unrelated Business Income Tax (UBIT). In the above example, the loan to value ratio is 50%. 50% of the $35,000 would be taxed as UBIT. This example has left out transaction costs (such as commissions, loan fees, etc.) for simplicity.

Vacation Homes

I know you are thinking, “I want to buy a vacation home with my IRA.” That is not permitted with a SDIRA. The IRS does not allow a property for personal use to be purchased through a retirement plan. What you can do, however, is buy a condo in ski country and rent it out full-time to anyone who is not considered a “disqualified person,” which includes your lineal descendants or ascendants, meaning you can’t rent it to your spouse, children, parents, grandparents, etc. There are a few more quirks regarding these rules, too, so be sure to check with your SDIRA custodian and tax advisor for further information. Your Realtor can help give you recommendations for a reputable custodian and tax advisor if you need them.

When you want to retire and move into the condo, you can disburse the condo from your plan as if it were cash. Percentage ownership can also be disbursed over several years.

Process for Buying Real Estate in Your Retirement Plan

  •    Open a SDIRA with a custodian or plan administrator which specializes in SDIRA services.
  •    Transfer or rollover funds from your current retirement plan (IRA, SEP, 401K, etc.) to the new SDIRA.
  •    Find a property to purchase.
  •    Make offer on property. The offer must be made in the name of the SDIRA (for example: XYZ Custodian SDIRA, FBO Your Name).
  •    Instruct SDIRA custodian to write earnest money check.
  •    If earnest money check is written personally, it should be replaced with a check from the SDIRA. 
  •    Do property inspection, financing, title work, appraisal.
  •    Pay for any expenses using retirement plan funds.
  •    Instruct SDIRA custodian to sign closing documents and write a cashier’s check for closing.
  •    Send deed to plan administrator. 

Using an LLC (Limited Liability Company) to Own Real Estate

You may create an LLC to own real estate for liability protection. The entity you create will hold the actual title to the real estate. Your retirement plan will then purchase shares in the LLC, and in effect, the SDIRA will own the LLC. The LLC will be the signer on the contract.

Managing the Property

If you own real estate in your retirement plan, you can use a property management company to deal with the day- to-day issues. Your SDIRA custodian will sign the contract with the management company. The property manager can collect the rent and pay the bills. Then the property manager will send the cash flow to the custodian. You then direct the custodian where to invest the cash.

When Your Retirement Plan Sells a Property

The SDIRA custodian will sign the listing contract upon your direction. Once a contract of sale is received on the property, the custodian will also sign it. In addition, the custodian will sign the closing documents. The proceeds check will be made out to the retirement plan. Then you tell the custodian where to invest the cash.

Is Investing in Real Estate Using IRA Funds Right for Me? 

It’s not for everybody. It is definitely a team effort to decide if it is right for you. Consult your tax advisor, SDIRA custodian, Realtor, financial planner, and property manager to see if you can come up with a plan that will accomplish your retirement goals. That plan just might include owning real estate in your IRA.  

For more information, see this video on RE/MAX of Boulder's YouTube channel: 


About Duane Duggan: Duane Duggan has been a Realtor® for RE/MAX of Boulder in Colorado since 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. He has been awarded two of the highest honors bestowed by RE/MAX International: the Lifetime Achievement Award and the Circle of Legends Award. Living the life of a Realtor and being immersed in real estate led to the inception of his book, REALTOR® for Life. Also see his video podcasts about real estate topics on RE/MAX of Boulder’s YouTube channel.

For questions, email Duane at or call 303-441-5611


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