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Real Life Planning Podcast Episode 29: Can I Put Real Estate in a Retirement Account?

Real Estate Coaching

In Episode 29, I discuss owning real estate in self-directed retirement accounts and tackle the potential benefits and challenges of this strategy.

“...you can't do the work on this investment property. So this is not a place where you can flip a house yourself, for example. You have to have an arm's length from the transactions in the self-directed IRA. You can't get in and fix the toilet or pick up a paintbrush. You're going to have to use contractors for everything. That makes it a lot more challenging” - Cynthia Meyer

This week on Real Life Planning Podcast:


What is a self-directed IRA and what investments are allowed in them? [00:01:32]


What are prohibited transactions in a self-directed IRA? [00:04:48]


What are my options to buy a property in a self-directed IRA? [00:07:47]


Can I personally manage properties in my self-directed IRA? [00:10:51]


How tax efficient are self-directed IRAs? [00:11:41]

Takeaway Quotes:

“If possible, if you're just getting started, and you're thinking that you'd like to build a self-directed retirement account strategy with real estate in it, thinking about building up that Roth IRA, or that Roth solo 401k, for example, is going to give you the maximum flexibility in terms of planning.” - Cynthia Meyer

“I'm personally not a huge fan of real estate in retirement accounts because I think investors give up the marvelous tax advantages of being a direct real estate investor.” - Cynthia Meyer

Connect with Cynthia Meyer:

About the Real Life Planning Podcast

Host Cynthia Meyer welcomes fascinating guests to share real-life stories of how they are realizing their financial potential. Each episode explores practical, realistic steps to create results.

Transcript of Episode 29

[00:00:11] Can you put rental properties into your IRA? Hi, I'm Cynthia Meyer with Real Life Planning, and this is the Real Life Planning Podcast, episode 29, and we are talking about self-directed individual retirement accounts.

[00:00:24] Now, first we're going to talk about self-directed IRAs in general, what they are, what's allowed, what's not allowed, what special rules and regulations are there around having a self-directed IRA.

[00:00:38] And then we're going to talk a little bit about if you're interested in the real estate in a retirement account topic, where it might make better sense and where it might not, and what some of the pitfalls are for some retirement accounts where it might not make as much sense.

[00:00:54] Now, I want to start off by saying, this isn't tax advice. I'm not giving you tax or investment advice here. This is really just educational today. It's a topic that you hear a lot in real estate groups, online, in Facebook or whatever, right? And there's a lot of chitchat around this, but the rules are actually quite clearly defined. And whether or not it makes sense in an individual situation really is going to be on a case-by-case basis.

[00:01:19] So if you're thinking about it personally, come talk to your financial planner or talk to your CPA about it, obviously, before you do anything.

[00:01:26] So let's get started and let's talk first about what is a self-directed IRA. So it's an IRA or an individual retirement account or any other kind of self-directed retirement account, we'll talk about the types in a second, that allows the participant in the plan to completely direct their own investment decisions. Now, you may say to yourself wait a minute, I already choose the securities that are in my Roth IRA, for example, I picked the mutual funds, or I picked the stocks or the bonds or what have you- but this is a little bit different. This allows you to choose non-traditional investments that are not publicly traded in the securities markets.

[00:02:09] And so what are those investment options The law quite clearly defines what's allowed and what's not allowed in a retirement account. So, if we're thinking in the real estate category, this could be single-family homes, small multi-family property. This could be things like commercial property, apartment buildings, shopping centers, health care facilities, et cetera. It could be land, either improved or unimproved land. It could be a limited liability company that owns another business, including investment real estate.

[00:02:44] It could be real estate that's offshore, right? Held in another country. It could be apartment buildings, condominiums, co-ops, et cetera, as long as they're used for the production of income. 

[00:02:57] You can't own your own home in an IRA. 

[00:03:00] Okay.It could be money that you lent to other people, right? A note or a mortgage for money that you lent to other people. It can be almost anything. I've heard stories about people who've owned race horses or yachts that they lease out to vacation rentals and that sort of thing. 

[00:03:16] It's not super common that people have self-directed IRAs. For those people who do have them, most of those people are in some kind of real estate.

[00:03:24] What can't you own in a self-directed IRA So the IRS says that there are a lot of things that you can't own. You can't own collectibles, right? So you can't own art; antiques. You can't own metals or gemstones like diamonds, for example.

[00:03:42] You can't own stamps or coins. Can't own alcoholic beverages, right? Can't own life insurance. And you can't own an S corporation. So S corporation tax laws prohibit IRAs from investing in them. And by when I say IRA, by the way, I'm really referring to all types of retirement accounts.

[00:04:00] So let's talk a little bit about those types of accounts. Now, we are talking about the individual retirement account, either a traditional or a Roth; pre-tax or after tax retirement account. We could do a 401k, a self-directed 401k, a solo 401k, typical structure to own investment real estate, especially a solo Roth 401k, but could be pre-tax or Roth.

[00:04:25] You can actually also own- have a self-directed HSA health savings account. Not that many people have balances big enough to own some of these investments, but it is possible that you could also have self-directed HSA.

[00:04:39] Certain people, you have to be careful when you're structuring the investments in the self-directed IRA that there isn't something called self-dealing .

[00:04:48] So there are disqualified persons that you can't do business with in your IRA or your retirement account. You can't do business with you. You can't buy your home and rent it from yourself in your IRA. You can't do business with your spouse, your parents, your grandparents, your kids, your grandkids or any spouses of lineal descendants like your daughter-in-law, for example. 

[00:05:10] So know that this is not a one size fits all arrangement here. This is for investing in assets or businesses that are not you personally or your immediate family. 

[00:05:24] So you can avoid prohibited transactions by making sure you're not doing any kind of transaction or business relationship with a disqualified person. You can't borrow money from your son-in-law, for example, to buy the property in the self-directed IRA. You can't sell a property that's in your self-directed retirement account to somebody in your linear family. You can't pledge it as collateral. You can't do anything for personal use and we're going to talk about that in a little bit. We're going to talk about this a little bit more.

[00:05:57] Now I'm not going to get into all the various account limits for how much you can contribute into a retirement account. But think about the self-directed retirement account is typically going to be in one of two areas.

[00:06:14] One, it's just a regular IRA that as I record this, the current limit for somebody under 50 is $6,500 that you can put in every year . You can make a catchup contribution if you're 50 or older like me. And the other, that can be either a pre-tax deductible IRA, it could be an after-tax IRA but that is not deductible or it could be making contributions to a Roth IRA are subject to some income limitations by making them directly. It could be a Roth IRA that you got in through the back door. You made a contribution to a traditional and then you converted it to the Roth.

[00:06:48] The other major area where people are putting money in that could be used in a self-directed fashion is through small business retirement plans. So that could be the solo 401k. So for the self-employed person and their spouse, that's a really common structure, right? Could be a SEP, for example. Could be a simple plan. Any kind of small business retirement plan has the option to have self-directed account attached to that. So in my business, helping real estate investors, I've seen some clients successfully set up solo Roth 401ks to buy investment real estate or to do syndications and that's been a little interesting and flexible and avoids some of the problems or difficulties that we're going to talk about in a second with the pre-tax retirement. So the limits for those also much larger; easier to get more money into the plan in a short period of time and that makes it a little easier to buy investment real estate, which is of course very expensive. 

[00:07:47] The first option to buy a property in a self-directed retirement account is to just buy it directly and individually. That would be if you have a large balance in the retirement account, that would be either buying the property for cash or buying the property and taking what's called a non-recourse loan. Remember, that nothing in an IRA can be pledged as collateral. You can't personally guarantee a loan for a property that's in the IRA, right? So the property has to be backed by the cash flows from that property in particular.

[00:08:21] So there's a few lenders, not that many, that lend money to investors who are buying properties in IRA or retirement accounts. It's also possible and probably beyond the scope of what we're going to talk about today to partner with another entity to buy a property that could be another IRA.

[00:08:41] So for example, you're buying half the investment property and the other spouse's IRA is buying half of the investment property. You could partner with personal funds. You could partner with other people's IRAs . And the ownership, just like any partnership is proportionate to the investment percentage that each partner brought to the table. 

[00:09:00] Again, getting back to that question about prohibited transactions- super important to know, and I don't think it's always clear in a lot of these social media posts that you see about self-directed retirement accounts on any real estate, is you can't mix your personal with your retirement account. Okay? Your IRA, for example, cannot buy the vacation property that you go stay at. You can't use this property.

[00:09:29] What are some other things to think about? I would invite you to think that as in any custom strategy the cost of complying with a strategy are going to be more expensive. So for example, you can go to a low fee firm and you can open an account for free or a super low fee, and you can invest in very low fee index funds and the cost of that investing is minimal, right? They're- the fees are really low. But if you are buying an individual property in any kind of retirement account, in a self-directed IRA, in a self-directed 401k, the costs are going to be higher, right? Could be 1 to 3% of the value of the account, possibly on an annual basis, depending on the activity that is happening and how much reporting needs to be done. So now, obviously an asset that needs to be valued with an expensive appraisal every year is going to be much more expensive to administer and the custodial cost will be higher. A situation where it's easier to value the investment, right? Where there's publicly available information makes the cost a little bit lower. You can certainly expect the fees for the custodian who holds the account for the self-directed IRA to be a little bit higher.

[00:10:51] The other thing is that I want to again, remind you that you can't do the work on this investment property. So this is not a place where you can flip a house, for example. You have to have an arms length from the transactions in the self-directed IRA. You can't get in and fix the toilet or pick up a paintbrush. You're going to have to use contractors for everything. That makes it a lot more challenging .

[00:11:19] So you can't just think of this as another possible funding source for your own personal real estate business that you manage yourself. You have to have agents who manage it for you. This is super important to remember. Remember, you have to have these arms length transactions, right? So it's not like you can just give all the business to your brother-in-law to do. 

[00:11:38] Then the third thing that I want to bring up that  I'm starting to see more of in my business is people who bought rental properties in their IRAs when they were younger, but now they're getting into the early retirement years, and they're starting to think about mandatory minimum distributions; required minimum distributions currently set at age 73 where you have to take out a certain percentage of your account every year and pay taxes on the amount that's distributed.

[00:12:08] So how does this work when you have a building? It's really complicated. There are different strategies, right? For retitling, for diversifying within the account so that you have non real estate funds to pull out for the RMD. It can be pretty complicated and if you are listening to this and you own a lot of real estate and retirement accounts, or even just one property, probably going to want to talk to a financial planner before you get to that RMD age so that you have a clear strategy for handling minimum distribution of an account when that happens.

[00:12:40] That brings me to the glories of the Roth IRA because there aren't any minimum distributions. If possible, if you're just getting started, and you're thinking that you'd like to build a self-directed retirement account strategy with real estate in it, thinking about building up that Roth IRA, or that Roth solo 401k, for example, is going to give you the maximum flexibility in terms of planning.

[00:13:05] I guess what I'd end with is, I'm personally not a huge fan of real estate in retirement accounts because I think as the investor gives up the marvelous tax advantages of being a direct real estate investor. Those include having depreciation shelter a certain amount of cash flow from taxes every year if you have a profitable rental.

[00:13:28] It also includes things like 1031 exchanges where you can do a tax deferred exchange of a property held in a trader business into a like kind property. If you're doing you're investing in- particularly in a pre-tax retirement account, you're not paying taxes in the current year, right? But you might have sheltered most of those taxes anyway with depreciation expense and with tax deferred 1031 exchanges, and you had a lot more planning flexibility going forward. 

[00:13:54] The other thing is when you have to take money out of a traditional pre-tax retirement account, you are paying taxes on anything you have not paid taxes on before. So that money comes out to you as ordinary income. It doesn't come out to you as a depreciation expense, right? There's no depreciation expense in properties held in a retirement account.

[00:14:15] So just some food for thought; things to think about. In the show notes, I'm going to post a couple of links to some other things that you can read and do some research about. Again, if you're thinking about it- could be a possible source of capital to get you started in real estate; think through that asset location question, right?

[00:14:33] Where are you going to own real estate? Where is it best to own securities?

[00:14:36] And make a good decision for yourself. So if you've got questions, leave them below. And let me know if there are any other topics you want to take in the podcast. Thanks.

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