IRA money can be used to fund an investment home

ORLANDO, Fla. – May 13, 2013 – It’s possible to use tax-sheltered money in an individual retirement account (IRA) to buy an investment home now with an eye toward retiring to it later. However, the rules aren’t easy to comprehend.
Donna Ryan, Florida Realtors manager of member legal communications, says advice can be conflicting on how the real estate investment program works.
“Anyone considering this type of investment should consult with a tax attorney or accounting professional first,” says Ryan. “There are pros and cons to embarking on this path.”
The method of investing in a single property requires the use of a self-directed “checkbook IRA.” Investors can buy an investment home now but later retire to it. They are self-directed IRAs because you can move your funds around.
Under Section 408 of the Internal Revenue Code, someone can invest in real estate funds set aside in a tax-sheltered IRA or other simplified employee pension, providing they don’t benefit directly. To do that, a limited liability company is created. Once the money is held in an LLC, a person may invest at their discretion.
The LLC can buy, sell and manage domestic, foreign, commercial, residential and rental properties, with the profits growing tax-deferred in the retirement account. Funds are held in a normal business bank account and managed similar to any other business account.
There are restrictions. The property can’t be the investor’s residence or used as a vacation home by anyone related to the owner. And like other IRAs, profits from the home cannot be taken out of the IRA without penalty prior to retirement. However, the house can be sold. It costs some money to set up the LLC, and accounts must have a custodian even if the IRA owner directs the funds.
A Vero Beach, Fla. resident who operates has been actively pushing the IRA-style investment.
“Very few people know about this,” says Lil Miller-Fox. “But it is a great way for someone like me to manage my retirement funds. I feel much more comfortable investing in tangible real estate than stocks and that sort of thing.”
© 2013 Florida Realtors®

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