Tips on Buying Sacramento Real Estate with your IRA

buying Sacramento real estate with your IRA

You understand that real estate can be an investment. But it’s kind of intimidating, right? You might not think you’re qualified to start buying property. Did you know you can take advantage of your qualified retirement account to purchase real estate? Because you can!

If you have an IRA retirement account, you may be able to tap into it to buy an investment property. But before you pull the trigger, it’s important to understand the tax implications, legal ramifications, and various other intricacies of purchasing Sacramento real estate within your IRA.

Let’s dive into some tips on buying Sacramento California real estate with your IRA!

Tips on Buying Sacramento Real Estate With Your IRA

Open a Self-Directed IRA

The first step for purchasing investment properties in Sacramento within your IRA is to open a self-directed IRA. If you don’t already have a self-directed type IRA, you’ll need to talk to a trusted financial advisor (or another fiduciary to act as the IRA custodian) to find a reputable and low fee self-directed IRA. Or, connect with us, and we can point you to some very good self-directed IRA companies we’ve worked with in the past.

A fee-only financial advisor can help you set up this account with minimal hassle, while a commission-based financial advisor may attempt to steer you clear of purchasing tangible assets within your IRA (he or she won’t earn much on the investment).

Types of Properties You Can Buy With Your IRA and Rules

You can own a wide variety of properties within your IRA. This includes: residential, commercial, and industrial structures, and even unused land. Many savvy investors choose to purchase parking lots, storage unit facilities, and other types of property that require little maintenance but still generate steady income.

There is one significant caveat: Your IRA cannot own any home where you live or vacation. Legally, you aren’t even allowed to spend one night in the property. You cannot avoid this restriction by “renting” the property from your IRA, or renting to your spouse, children, grandchildren, parents, or grandparents. Nor can you use an IRA to purchase property from close family. You could, however, rent to property to a sibling, cousin, or friend. Some investors purchase a home for their IRA, rent it out for income until retirement, and then assume residence when they’re no longer working.

How Does Income Work With Real Estate in an IRA?

The income generated in your IRA may not be used for your “personal current benefit.” This means that all income generated by the property must remain within the IRA until you retire. Selling the property will require you to leave all profits within your IRA. In other words: you can’t buy a property with your IRA, make some improvements, and then flip it for an immediately accessible profit.

You should also know that property taxes, insurance, improvements, and other costs associated with the property must be paid by the IRA. Failure to comply with these regulations could disqualify your IRA, subjecting you to income taxes on the entire value of the property, plus a 10% early distribution penalty.

It’s important the all distribution rules associated with an IRA (or Roth IRA) including taxation, required minimum distributions, beneficiaries, and other factors do not change when using a self-directed IRA to purchase property. There can be a huge upside buying Sacramento real estate with your IRA , but it’s best to know exactly what’s in store.

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