Pros and Cons of Using IRA Money to Buy Real Estate

It’s possible to buy real estate using a self-directed IRA, and some experts recommend it. But, is it the right choice for you? It depends on a few factors. To make the right decision for your situation, consider the following advantages and disadvantages of using IRA money to buy real estate.

Con: You Have to Pay Cash

The first possible downside to consider is that you can’t mortgage the real estate investment you buy with an IRA. You have to pay cash. You also need to pay all ownership expenses using your IRA. So if you don’t have the cash to pay upfront for the property, using an IRA for real estate won’t work for you.

Pro: You Can Diversify Your Portfolio

One of the best reasons people buy property with an IRA is the chance to diversify their investments. This can pay off over time and may be something to consider if you currently don’t have any property as part of your portfolio.

Con: You Can’t Use the Property You Buy

The real estate you buy with an IRA must be only for investment purposes. This means you and your family can’t live in it or vacation in it. You can’t even pay yourself or a relative to manage the property. Instead, you’ll have to hire a business or individual outside your family to maintain or make repairs to the real estate investment you buy with your IRA.

Pro: You Can Get a Good Rate of Return

One advantage of using an IRA for real estate is the chance to get a good rate of return on your investment. If you rent out your property, all rental income goes right to your IRA tax-free, meaning there will be a large lump sum waiting for you when you withdraw from your account as you retire.

Con: You Might Not Have Access to Certain Tax Breaks

When you buy real estate with an IRA and the property operates at a loss, you won’t be able to get the tax breaks you normally would. Since you don’t have a mortgage—as you paid cash—you won’t be able to deduct mortgage interest payments at tax time. You also can’t claim depreciation on the property.

As you can see, there are some pros and cons of buying real estate with an IRA. This move is mostly recommended for people who are experienced real estate investors. If that’s not you, it may be best to focus on other investments, or at least buy real estate through other means rather than your IRA. 

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