While most people understand that real estate is a solid investment, many are now leveraging their qualified retirement accounts, such as IRAs, to purchase real estate as an appreciating or revenue-generating instrument.
However, it’s essential to understand the tax implications, legal requirements, and other intricacies involved when purchasing real estate in Massachusetts with your IRA.
In this blog, we’ll cover some key tips and strategies for buying real estate with your IRA, including the benefits, rules, and steps to get started.
Tips on Buying Real Estate With Your IRA in Massachusetts
Open a Self-Directed IRA
If you don’t already have a self-directed IRA, your first step is to connect with a trusted financial advisor to find a reputable and low-fee provider. A self-directed IRA allows you to invest in a broader range of assets, including real estate.
A fee-only financial advisor can help you set up this account with minimal hassle. Be cautious of commission-based advisors who may discourage tangible asset investments due to lower earning potential for them.
Types of Properties You Can Buy With Your IRA and Rules
You can own a wide variety of properties within your IRA, including residential, commercial, and industrial structures, as well as vacant land. Savvy investors often choose low-maintenance, income-generating properties like parking lots or storage units.
However, there are important restrictions:
- Personal Use Prohibited: Your IRA cannot own a property where you or close family members live or vacation.
- Rental Rules: Properties must be rented to non-disqualified individuals (e.g., not your spouse, children, or parents).
- Future Use: Some investors purchase properties within their IRA, rent them out for income, and assume residence after retirement.
How Does Income Work With Real Estate in an IRA?
Income generated by the property must remain within the IRA until retirement. Expenses like property taxes, insurance, and maintenance must also be paid by the IRA. Mismanaging these funds or using the income for personal benefit can disqualify the IRA, resulting in taxes and penalties.
Benefits of Using an IRA to Invest in Real Estate
Investing in real estate through your IRA offers several advantages:
- Tax-Deferred Growth: Any profits or rental income generated by your investment grow tax-deferred (or tax-free in a Roth IRA), allowing you to build wealth more efficiently over time.
- Portfolio Diversification: Real estate adds a tangible, income-generating asset to your portfolio, reducing reliance on stocks and bonds.
- Long-Term Stability: Real estate often appreciates over time, providing a stable and secure investment for your retirement.
However, it’s important to evaluate whether these benefits align with your overall financial goals. Consulting with a tax advisor or financial planner is essential to ensure compliance and maximize returns.
Steps to Set Up a Self-Directed IRA for Real Estate
- Choose a Custodian: Research and select a reputable custodian or trustee specializing in self-directed IRAs. Look for low fees, good reviews, and a user-friendly platform.
- Fund Your Account: Transfer or roll over funds from an existing IRA or 401(k) into your new self-directed IRA.
- Identify Properties: Work with trusted real estate professionals, such as Pegasus Home Buyers, to find suitable properties for your investment goals.
- Make the Purchase: Your IRA custodian will handle the transaction and title the property in the name of your IRA. Ensure all income and expenses flow through the IRA account.
Common Pitfalls to Avoid
When investing in real estate through your IRA, it’s critical to avoid these common mistakes:
- Not Understanding UBIT: Unrelated Business Income Tax (UBIT) may apply if your IRA earns income from certain business activities or uses leverage to finance the property.
- Failing to Pay Expenses Properly: All property-related expenses must be paid from the IRA account, not your personal funds.
- Violating Prohibited Transactions: Renting to or purchasing from disqualified persons can result in severe penalties.
By staying informed and working with experienced professionals, you can mitigate these risks and maximize the potential of your real estate investment.
Why Real Estate in an IRA Could Be Right for You
Real estate investments offer a tangible and often lucrative way to build your retirement portfolio. Unlike traditional investments, real estate provides an opportunity for steady cash flow, long-term appreciation, and a hedge against inflation.
If you’re considering adding real estate to your retirement strategy, Pegasus Home Buyers can guide you through the process. We specialize in identifying investment opportunities that align with your goals and ensure compliance with IRA regulations.
Ready to explore real estate opportunities in Massachusetts? Contact Pegasus Home Buyers today to learn more about available properties and how we can help you achieve your investment goals.