While most people understand that real estate is an investment, many people are taking advantage of the qualified retirement accounts to purchase real estate as an appreciating or revenue-generating instrument like IRAs.
It’s really important to understand the tax implications, legal ramifications, and various other intricacies of purchasing Hattiesburg real estate within your IRA.
So, let’s dive into some tips on buying real estate with your IRA in Hattiesburg MS!
Tips on Buying Real Estate With Your IRA in Hattiesburg
If you don’t have a self-directed type IRA… first off… you’ll need to connect with your trusted financial advisor to find a reputable and low fee self-directed IRA. Or, connect with us and we can direct you to some very good self-directed IRA companies we’ve worked with in the past.
Open a Self-Directed IRA
The first step for purchasing investment properties in Hattiesburg within your IRA is to open a “self-directed” IRA. This unique type of account allows you greater flexibility in choosing investments. To set up your self-directed IRA, you will need to consult with a qualified financial advisor or a trusted fiduciary who can serve as the custodian for your IRA. Opting for a fee-only financial advisor can simplify this process significantly, as they are focused on providing transparent guidance without conflicts of interest. In contrast, a commission-based financial advisor may dissuade you from investing in tangible assets within your IRA, as such investments typically yield lower commissions. By choosing the right advisor, you can navigate the setup of your self-directed IRA with ease and confidence, paving the way for strategic investment opportunities in real estate.
Types of Properties You Can Buy With Your IRA and Rules
You can own a wide variety of properties within your IRA, including residential, commercial, and industrial structures, as well as unused land. Many savvy investors choose to purchase parking lots, storage unit facilities, and other types of property that require little maintenance but generate steady income.
Your IRA cannot own any home where you live or vacation. Legally, you aren’t even allowed to spend one night in the property. You cannot avoid this restriction by “renting” the property from your IRA, or renting to your spouse, children, grandchildren, parents, or grandparents, nor can you use an IRA to purchase a property from close family. You could, however, rent property to a sibling, cousin, or friend. A solution that many investors implement is to purchase a home for their IRA, rent it out for income until retirement, then assume residence upon retirement.
How Does Income Work With Real Estate In An IRA?
When investing in real estate through your Individual Retirement Account (IRA), it’s crucial to understand the regulations governing the income generated from such investments. The funds generated within your IRA cannot be utilized for your immediate personal benefit. This stipulation means that all income derived from the property—whether it’s rental income or profits from a future sale—must remain within the confines of the IRA until you reach retirement age.
Should you choose to sell the property, it’s imperative to reinvest all profits back into the IRA rather than withdrawing them for personal use. Furthermore, ongoing expenses like property taxes, insurance premiums, necessary improvements, and various other costs related to property management must be paid directly from the IRA account. Neglecting these regulations could have serious ramifications, including the potential disqualification of your IRA. Such disqualification may result in immediate income taxes on the entire value of the property, along with an additional 10% penalty for early distribution if you are under retirement age.
It’s also essential to recognize that the fundamental distribution rules for IRAs, including the tax implications, required minimum distributions (RMDs), and rules concerning beneficiaries, remain unchanged when you utilize a self-directed IRA for real estate investments. While investing in real estate through your IRA can offer significant growth potential, it’s wise to have a clear understanding of the responsibilities and regulations involved to navigate this process effectively.