Personal Finance: Real estate investments in IRA retirement funds

Personal Finance: Real estate investments in IRA retirement funds

April 25th, 2012 by Chris Hopkins in Business Diary

With stock market returns essentially flat over the past 10 years, more people are asking if it is permissible to invest in real estate inside their IRA account. The answer is: yes, but. It is indeed possible to buy property with retirement account funds, but the rules are stringent and the cost of mistakes is high.

While most of us are familiar with traditional IRA accounts in which we can hold stocks, bonds, mutual funds and CDs, the universe of allowable investments is actually quite large. In fact, the IRS code basically enumerates which assets are not allowed (collectibles, artwork, stamps, booze, antiques and so on). What remains is a large opportunity set of asset classes that could potentially be owned in a tax-deferred retirement account. One complicating factor is the ability to locate an approved trustee willing and able to hold unconventional investments.

Individual Retirement Accounts were created in 1974 to foster savings and investment by individuals not covered by an employer plan, and to provide for supplemental retirement savings for plan participants. Earnings and investment gains grow tax deferred until withdrawn, provided the assets are held in a specific type of trust account under the aegis of an authorized custodian or trustee. Although there are now many variants of the original IRA, all share this basic structure.

The vast majority of accounts are established with traditional depository institutions like banks and broker-dealers that agree to hold only publicly traded securities. Of the $4.6 trillion in IRA assets in the US, more than 95 percent are held at these conventional custodians, according to the Retirement Industry Trust Association.

However, some trustees specialize in non-traditional assets like real estate. Fees for holding these types of investment are substantially higher due to the complexity of administration and reporting, but may be worth it if the investor is sufficiently experienced and knowledgeable. Virtually any type of property is permitted, including single- and multi-family homes, commercial property, farm and undeveloped land, and even mortgages.

Investors considering real estate in their IRA should enlist an expert and must do their homework. Transactions must be arms-length, and the owner cannot utilize the property for his own personal benefit or that of his family. For example, one may purchase a beach house in the IRA to rent as income property, but may not vacation there or allow family members to do so.

All related financial transactions must be conducted inside the IRA. Rent and sale proceeds must stay in the account, while maintenance expenses, upkeep and improvements must be paid for from the account. Failure to follow the rules can trigger an immediate distribution of the entire asset, triggering income tax liability and possible penalty if the account holder is under 59.

Most investors are better off sticking with REITs or funds to gain real estate exposure in their retirement accounts. Nevertheless, for experienced real estate investors with proper professional advice, holding property in an IRA is quite permissible and may be perfectly appropriate.

Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Christopher A. Hopkins CFA, is a vice president at Barnett & Co. Submit questions to his attention by writing to Business Editor Dave Flessner, Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by emailing him at