Investors that have successfully purchased real estate with an IRA often have questions about making a second purchase. Building a real estate portfolio funded by an IRA is becoming more commonplace as it becomes harder to get approval for loans used to purchase rental properties and vacation homes. The strict IRS rules that are attached to IRAs must be followed at all times or an IRA can be dissolved. If you are considering making a second home purchase, know what you can and cannot do with your IRA to avoid disqualified activities.
IRA Penalty-Free Distributions
The rules for IRA distributions and investments do not apply to all circumstances. There are some ways to avoid 10 percent early distribution penalties, but not every real estate investor that is using an IRA account will be able to qualify.
Penalty-Free Distributions include:
• First Home Purchase
• Qualified Medical Expenses
• Permanent Disability
• Insurance Premiums When Unemployed
• Death Beneficiary
• Periodic Annuities
• Higher Education Expenses
• Job Loss After Age 55
• Qualified Domestic Relations Orders
• Qualified IRS Section 72(t) Distributions
PreRetirement Real Estate Investing Rules
A self-directed IRA is the only allowable IRA that can be used to invest in real estate. If your current IRA is handled by a custodian, you will have to transfer the account to a new custodian that permits self-directed Roth IRA accounts. Not every bank, credit union or similar financial institutions offer self-directed IRAs.
You can buy a second home with IRA money, but there are some restrictions that you must know about. If withdrawn funds are not included in one of the penalty-free exclusions, you will have to pay a 10 percent penalty on all funds that are withdrawn to make your purchase. The IRS allows only a $10,000 total distribution for the purchase of your first home only. This is considered a lifetime distribution limit.
Your IRA cannot purchase any real estate that you plan to live in personally or that will be used as a residence of another disqualified person. The IRA can only be used to purchase real estate investment properties or vacation homes. Prohibited transactions involving your IRA are not allowed and could lead to account closure if discovered by the IRS.
Rental Income from IRA Property Purchases
The amount of income that you receive from a rental or vacation home is good for rebuilding your IRA funds. The money that is collected each month is deposited back into your IRA and can be used however you wish. Your distributions must adhere to the current IRS rules to avoid penalty assessments. Many investors have found that owning one or more properties is one of the easiest ways to build a continuous income source every month. The income that flows in from investment properties held in IRAs grows tax-free and can be distributed usually at age 59½. As an alternative to stock market investments, purchasing a second home with an IRA provides a solid way to earn a considerable profit.
Next Steps
Want to learn more about investing in rental properties passively? Watch our free webclass and discover the 3 keys that every investor should know before they make their first rental property investment. If you have any questions or if you would like to speak with a member of our team, please fill out the form or give our office a call at (904) 677-6777.
