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Can I Use My IRA To Invest In Rental Properties?

At 1031 Exchange Place, we specialize in facilitating tax-deferred property exchanges and providing comprehensive guidance to our clients. As for using your IRA to invest in rental properties, the answer is yes, you can. However, there are specific rules and guidelines you need to follow in order to avoid any tax implications or penalties.

To invest in rental properties using your IRA, you will need to set up a self-directed IRA (SDIRA). A self-directed IRA allows you to invest in a wider range of assets, including real estate. Not all financial institutions offer SDIRAs, so you’ll need to find a specialized custodian or administrator that does.

There are a few essential points to keep in mind when investing in rental properties with your SDIRA:

  1. Arms-Length Transactions: All transactions must be at arm’s length, meaning you cannot buy, sell or lease property from or to yourself or any disqualified person, such as a spouse, child, or parent.
  2. Prohibited Use: You and your immediate family members cannot use or benefit from the rental property while it is held in your IRA. This means you cannot live in the property or use it for personal purposes.
  3. Exclusive IRA Funds: You must use funds from your SDIRA to cover all expenses related to the property, including the purchase, maintenance, taxes, and insurance. Similarly, all rental income generated by the property must be deposited back into your SDIRA.
  4. No Sweat Equity: As the IRA owner, you cannot perform any maintenance, repairs, or management tasks related to the property. You must hire third-party service providers for these tasks and pay them from your SDIRA account.
  5. UBIT Tax: If you leverage your IRA investment using non-recourse financing, you may be subject to Unrelated Business Income Tax (UBIT) on a portion of your rental income.

Investing in rental properties with your SDIRA can be a great way to diversify your retirement portfolio and potentially generate tax-deferred or tax-free income, depending on the type of IRA you have. However, it’s crucial to understand and follow the rules to avoid any tax implications or penalties. We recommend consulting with a financial professional or tax advisor to ensure compliance with IRS regulations when investing in rental properties with your IRA.