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The stock market is tanking while real estate continues to skyrocket.  

If your retirement savings have taken a hit, you may be wondering if this is the time to invest in real estate through your IRA, Roth IRA, or SEP-IRA. 

You can’t invest in real estate with a traditional IRA or Roth IRA (or SEP-IRA) you establish with a bank, brokerage, or trust company. These types of IRA custodians typically limit you to a narrow range of investments, such as publicly traded stocks, bonds, mutual funds, ETFs, and CDs.  

But you can invest in real estate if you establish a self-directed IRA with a custodian that allows self-directed investments. There are dozens of such IRA custodians. 

Real estate is the single most popular investment in self-directed IRAs. The self-directed IRA can be used for all types of real estate investments: multi-family rental properties, single-family homes, commercial rentals, raw land, farmland, international real estate, tax lien certificates, trust deeds and mortgage notes, and private placements. 

Investing in real estate through a self-directed IRA is one way to diversify your retirement holdings. There are also some tax advantages.  

And there are several disadvantages and complications you should carefully consider. 

First, you need to understand that owning real estate in a self-directed IRA is not like owning it any other way, because you and your self-directed IRA must be totally separate—self-dealing is not allowed.  

You, the self-directed IRA owner, should not benefit from your self-directed IRA other than through distributions from the self-directed IRA. And your self-directed IRA itself should not benefit from you other than through contributions you make to the account. 

In practical terms, this means you, your relatives, and certain other “disqualified persons” cannot do business with your self-directed IRA. For example, you can’t 

  • sell property you personally own to your self-directed IRA, 
  • purchase or lease property from your self-directed IRA, 
  • personally guarantee loans taken out by your self-directed IRA to purchase property, 
  • receive rental income from a rental property held in a self-directed IRA, or 
  • repair or improve any self-directed IRA property. 

If you do any of these things, your self-directed IRA could lose its tax-deferred status. If that happens, you then pay taxes on the value of all the property the IRA owns. 

When your self-directed IRA owns real estate, you also don’t benefit from real estate tax deductions such as depreciation and the 20 percent qualified business income (QBI) deduction. 

It may not be pleasant to think about, but upon your death, there is no step-up in basis for real estate held in the self-directed IRA. Instead, your beneficiaries pay tax at ordinary rates on any money or property distributed from a traditional self-directed IRA. This eliminates one of the most valuable tax benefits for real estate owners. 

Don’t get the idea that self-directed IRAs are all bad. None of the income from property held in a self-directed IRA is taxable to you personally. Likewise, if you sell property in a self-directed IRA, you need pay no personal tax on any profit. You pay tax only when you withdraw money from a traditional IRA.  

With a self-directed Roth IRA, you pay no tax at all on withdrawals after age 59 1/2, provided your IRA held the property for at least five years. 

But you need to balance these benefits with all the potential drawbacks.

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