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Property Investment & Mortgages In a Retirement Account

When stocks take a plunge, as they’ve been known to do every few years, many investors end up losing much or all of the gains they had managed to build since the last market dip.  Bonds are more secure, but the returns can be quite meager, a big trade-off for that security.  It’s probable that more investors would consider real estate for retirement investing if they knew that their retirement account could fund it.  A 401k or IRA can be used to invest in real estate, whether to buy and hold for appreciation, flip quickly, or to hold and manage for rental.  It takes some setup work, and the rules must be followed carefully to avoid tax penalties, but real estate could be a more secure and profitable path to retirement for a great many investors.

Research the Value

Determining if real estate investment in a retirement account is appropriate for an individual is a combination of gathering real estate knowledge, and getting a short education in tax advantages, as well as the costs and pitfalls involved.

  • Is there enough money in the account to fund an effective real estate investment strategy?  As there is a different and much less advantageous tax treatment of borrowed money to finance a purchase, the more of the purchase price that can be made with cash from the account the better.
  • Will the investor be able and willing to educate themselves about real estate, the local and and national markets, and do the due diligence necessary to buy wisely, and manage properties for profits?  It’s a much more active approach, while many investors will prefer the more passive investment in REITs, Real Estate Investment Trusts.
  • The advantages of deferring taxes on real estate gains in a retirement account can help an investor to build a real estate portfolio, or just manage a very profitable rental property that will appreciate in value over time, with positive cash flow in the interim.
  • Even a “buy, rehab and flip” approach is viable, making smart buying decisions, using retirement funds for the rehab work, and selling in the retail market for a fast turnover at a nice profit.

Moving the Retirement Account for Real Estate Investment

None of the major retirement account custodian and management firms will allow real estate in the account.  They are set up to manage stocks, bonds and annuities, and part of their compensation is likely to be transaction fees for the buying and selling of those instruments.  So, moving the retirement account is the first order of business.  There are custodians and management companies that specialize in retirement real estate investment management.  Their fees are higher, and there can even be single transaction fees for every activity or transaction.  As every dollar, even the $4.00 cutting of new door keys, must go through the account, these fees can mount up.  A careful investigation of the fee structure should be top priority.  A search on the Web for any variation of key phrases using “retirement account,” “IRA,” and “real estate investment” will turn up a number of companies that make this their core business.

Follow the Rules or Lose the Tax Advantages

Actually, it’s worse than just losing them, there can be significant penalties if an investment loses its tax advantaged status due to an inadvertent violation of the IRS rules.  These rules change, and should be thoroughly studied before jumping in, but here are the basics:

  1. The property cannot be used for personal purposes, be a personal residence, or be used as a vacation home.  It must be an investment property.
  2. A personal home can’t be converted and placed into this status.  The purchase must be made from the account.
  3. ALL money, in and out, must flow through the retirement account.  Even paying cash out of pocket for a small item could jeopardize the tax advantaged status of the investment.  Whether it’s maintenance or paint for a room, the purchase must be made through the retirement account.
  4. If a property is financed, only the cash portion of the investment is sheltered.  Example:  The property selling price is $100,000, and the investor puts $70,000 down and finances $30,000.  Simplified, the income and profits on the investment would be 70% sheltered, with the other 30% subject to regular income tax.

There are other rules, but these are the basic requirements and limitations.  Generally, cash is the best way to go for simplification reasons and to avoid a tax surprise.

There is a great opportunity for retirement investment in real estate if the investor can meet the requirements and has the funds to make a purchase.  Some investors have merged retirement accounts to increase available cash for real estate investment.

Jim Kimmons – Expert Jim is a New Mexico real estate broker who has held real estate brokerage licenses in Texas and Colorado during his 15 years of real estate practice. He is the Real Estate Business Guide writer for the New York Times website at where he takes a pro-consumer stance in writing business articles for real estate agents, mortgage brokers, and real estate investors.

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