The popularity of using IRAs and other retirement accounts (often referred to self-directed IRAs) to invest in real estate continues to grow. Self-directed investing can be beneficial because it provides the flexibility to invest in assets beyond traditional investments – including real estate – as well as potential advantages such as tax-deferred or tax-free growth.
If you and your financial advisor or tax professional decide that self-directed investing is right for you, it’s important to do your due diligence on any prospective investment and understand the associated rules before taking part in any investment.
Once you decide on an investment, here are some resources to help guide your expectations during the process.
Self-directed rules to know
Investing inside an IRA is different than investing outside of an IRA because of the IRS rules that must be followed. Here is a summary of some of those rules, which can be found in IRS Publication 590.
You are unable to:
- Purchase property from a disqualified individual
- Sell a piece of real estate owned by your account to a disqualified person
- Disqualified individuals are not able to live, rent, or work on a property owned by your account
- Any income earned from the property must return to your account
- All expenses related to maintenance, upkeep or improvements to the property must be paid from your account
5 steps to making a self-directed investment
The first step to making a self-directed investment is to have an account open. Once that has happened, this is how the investment process works in an Equity Trust account:
- Identify an investment and perform due diligence – Self-directed investing means it’s your responsibility to research any potential investment and any third parties involved and evaluate the risk-return potential.
- Request funds and direct your investment– Submit a Direction of Investment form to Equity Trust (this can be submitted through the online client portal myEQUITY).
- Equity Trust processes your investment– Equity Trust processes your Direction of Investment form and sends the funds, per your instructions, to complete the investment purchase.
- Manage the investment within Your IRA– This continues as long as your IRA owns the investment.
- Act on your exit strategy and plan your next steps – You then decide what you will do with the asset. Options are to sell it, take a distribution from your account (from the proceeds or distribute the asset in-kind), or keep it in the account and pass it to a beneficiary.
Discover how self-directed investing could help you with your retirement wealth building. Download your free Self-Directed IRA Success Kit today!
Equity Trust is a passive custodian and does not provide tax, legal or investment advice. Any information communicated by Equity Trust is for educational purposes only, and should not be construed as tax, legal or investment advice. Whenever making an investment decision, please consult with your tax attorney or financial professional.