What is Real Estate?

Real estate or real property is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings. Specifically, it is property that is stationary or fixed in location and may be purchased within a retirement account if permitted by the custodian.

The types of real estate that can generally be purchased in a retirement account include:

• Single family and multi-unit homes.
• Apartment buildings
• Co-ops
• Condominiums
• Commercial property
• Improved or unimproved (undeveloped) land

There are rules regarding the purchase of real estate in a retirement account. Namely, when purchased, these properties become assets of the retirement plan or account. Other rules that must be followed include.

Retirement accounts may also purchase or sell portions of promissory notes, typically seen with mortgages and deeds of trust. In such cases, the account holds an undivided interest in that portion of the note and receives the proportionate amount of income due under its terms. In addition, retirement accounts may purchase discounted notes as well as real estate purchase options.

• Property may not be purchased with personal (non-qualified) funds with the intent to have your retirement account purchase the property.
• The property cannot have been owned by the retirement plan owner, their spouse or any family members (other than siblings) prior to its purchase by the retirement account.
• Neither the retirement plan owner nor family members (other than siblings) may live in or lease the property while it is held in the retirement account.
• The retirement owner’s business may not lease or be located in or on any part of the property while it is held in the retirement account.
• The retirement account owner may take an “in-kind” distribution of a real estate property from the retirement account, which would generally be a taxable event.

If the retirement account does not have sufficient funds to pay for the entire purchase, it may be able to finance or leverage any income-producing property through a non-recourse loan. The property is used as the collateral for the loan. Because the property belongs to the IRA, the repayment of the underlying debt must come from assets within the retirement account, whether it’s income from the property, annual contributions or other assets in the IRA.

Real estate is generally not considered a liquid investment. For individuals that may be approaching retirement or may need to draw upon their retirement funds, real estate may not be a suitable investment choice