Should You Use Your IRA to Invest in Single-Family Rental Real Estate?

Posted by Michael Miller on March 26, 2018

By age 40, you should have saved three times your annual salary in a retirement fund, according to many financial advisors. Not there yet? That’s OK. As a real estate investor, you can use your real estate knowledge and connections to bolster your retirement fund using your IRA. In fact, investors are fortunate to have multiple avenues to invest in retirement that may not be as easily accessible to the general population.

“Real estate, by itself, can form the foundation of a solid retirement plan,” says Steven Davis, CIO and CFO of 5 Arch. “Providing you have a property management agency to handle your rentals, MDUs and single-family homes can create passive retirement income. That’s not to mention all the other ways you can use your expertise to build your nest egg, such as using your IRA to invest.”

Benefits of Using Your IRA to Fund Your Property Purchase

The main advantage to using an IRA for an investment property like a single-family rental (SFR) is the ability to roll funds from one property to another without paying capital gains tax. IRA income is always tax-deferred. However, if you buy and sell properties strategically using other people’s money, you can enjoy the same tax advantages.

Using your IRA to fund your real estate investments and putting the profits back into the IRA also gives investors greater control over their retirement savings. By using an IRA to fund real estate purchases, investors can essentially pick their own investment opportunities within a market they understand, rather than leaving the choice to a financial advisor or selecting from an assortment of mutual funds.

“Using their IRA to fund investment properties puts the power to grow that IRA into the investor’s hands, rather than leaving their retirement income to the whims of Wall Street,” says Davis.

Why IRA Funds May Not Be the Best Choice for Real Estate Investment

Using your IRA to buy investment property can also create a lengthy list of limitations. You can’t claim depreciation on the property, which you can if you use other funds. If the property operates at a loss, you can’t claim the deduction.

Additionally, you must hire contractors to perform repairs, and hire a property manager to handle all administrative tasks associated with the property. For some investors, this might be part of their usual business processes. But if you want greater flexibility to manage your properties, using an IRA to invest may limit your options and even increase your expenses.

Due to complex tax laws, you cannot rent the property to relatives, use it yourself, or hire any family members as contractors or property managers. Additionally, if the property needs repairs or maintenance, the money must come from within the IRA, and any income must go back into the retirement account.

“Given these limitations, many investors decide they would rather find funding through a lender such as 5 Arch and maintain the freedom to manage, maintain, rent, and repair the property in whatever ways they see fit,” says Davis.

Other Retirement Strategies for Investors

Even if you opt not to use your IRA to fund investment properties, you can put your knowledge of the real estate market to work to bolster your retirement in other ways. For instance, you can sit on a profitable single-family rental property with plans to use the passive income to pay for retirement.

If tax deferment is your goal, you can use a 1031 exchange to defer capital gains tax on the sale of a property, without many of the restrictions imposed by using an IRA to invest.

Looking For a Way to Borrow Better? 5 Arch can help

5 Arch Funding is not a tax advice expert, law firm or accounting firm.  The content of this article is informational only and is not intended as tax, legal or accounting advice.  Consult your own tax, legal or accounting professional for guidance.


This article was originally published on October 17, 2017 and was updated on March 26, 2018.

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