Buying Rental Real Estate With Your IRA or 401K

Yes you can direct your custodian or trustee to purchase investment real estate with your IRA or 401(k). If you have the right type of plan. A truly self directed IRA or 401(k) allows you the control over what you can invest in – as long as it is not prohibited by the IRS.

Buying real estate with your retirement dollars has been written about many, many times by many different authors, so I am not going to beat you up with more of the same. Buy a rental property with your retirement plan - rents are treated the same as a dividend and specifically excluded as an active trade or business that could trigger certain tax consequences.

Instead, I would like to share some of the questions I get from people trying to find a unique solution to a problem or issue they are currently facing.

Joe from California called and has two rental homes he owns – both with loans and both upside down (more debt than equity). He has a pretty large sum in his 401(k) at work and wants to use these funds to help refinance his debt to something more affordable.

Unfortunately he only has two options – take a loan from his 401(k) of which the maximum allowed is $50,000 and must be paid back over a 5 year period, or take a distribution and pay taxes and penalties. Lending money to yourself, or using your retirement plan to buy real estate you or your LLC already own, are strictly prohibited.

A prohibited transaction will cause your entire retirement plan to be distributed, with hefty penalties (up to 100%!!!) plus taxes on the entire distribution. If you have your funds invested in less-than-liquid investments like real estate you may be forced into a fire sale to pay the tax and that could compound your loss.

Hal from the Phoenix area has a retirement home he wants to buy and move into when he retires in 5 years. Unfortunately the community where he wants to buy the home does not allow rentals to anyone other than immediate family members. His daughter wants to rent the home, but as a disqualified person (son,daughter, dad, mom - in other words a linear relation) she is prohibited from occupying the property – so no can do.

Bill from Las Vegas  has a lot he wants to build his retirement home on and has about 15 years until he retires. Land is (dare I say it?) dirt cheap these days and he would like to acquire this premium spot while it is affordable. This transaction is OK until you get to the meaty part – he wants to camp on the land between now and retirement.

While it seems counter-intuitive his accountant recommended he go ahead and distribute enough funds to buy now and pay the penalties and taxes today. Ouch you say? Well who knows where tax rates are going to be in the future – with so much government debt do you think they are going lower?

At the end of the day you are going to pay taxes on your retirement funds someday. If there is another way to help you build value for your retirement, in this case a very low cost lot at a very good location, purchased to hold the home he and his family will enjoy throughout his retirement years, paying the piper today just might be your best alternative.

About Roger Simard

Roger P. Simard, CFP® Roger P. Simard is the founding principal of Genesis Financial Advisors, LLC, and Genesis Tax Advisors, LLC. He heads the firm's corporate and personal financial planning practice and oversees all operations. Mr. Simard concentrates his work in the fields of financial planning, real estate investing, tax planning, and portfolio management. Mr. Simard is a Certified Financial Planner™ and has over 23 years of experience helping individuals and businesses achieve financial success. Mr. Simard was a speaker for The Prudential Spirit of Community Awards, a nationwide youth recognition program honoring secondary school students for outstanding service. He is a frequent speaker and radio guest on business and taxation issues and successful investment strategies and provides Continuing Education classes for Realtors.
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One Response to Buying Rental Real Estate With Your IRA or 401K

  1. Very impressive! I have developed some great ideas about purchasing investment real estate with IRA. Thanks a lot for such an informative blog post.

    Custodian Wealth Builders

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