How to Buy Real Estate with Your IRA in Baton Rouge: Key Tips for Investors

While many people know real estate is a great investment, fewer are aware that you can use qualified retirement accounts—like IRAs—to invest in real estate as a means of generating income or appreciating in value. However, purchasing real estate within your IRA comes with unique tax implications, legal considerations, and other important details you should be aware of.

Let’s explore some essential tips for buying real estate with your IRA in Baton Rouge, LA.

1. Open a Self-Directed IRA

The first step in purchasing real estate within your IRA is to open a “self-directed” IRA. Unlike traditional IRAs, a self-directed IRA allows you to invest in alternative assets like real estate. To do this, you’ll need to work with a qualified financial advisor or a trusted custodian who specializes in self-directed IRAs.

It’s important to choose a fee-only financial advisor who can set up the account without pushing you toward investments they earn commissions on. Some commission-based advisors may steer you away from real estate since they won’t profit much from it. If you need help finding a reputable self-directed IRA provider, we can connect you with companies we’ve worked with successfully in the past.

2. Know What Types of Properties You Can Buy—and the Rules

Your self-directed IRA can hold various types of properties, from residential and commercial real estate to industrial buildings and undeveloped land. Many investors opt for low-maintenance options like parking lots or storage facilities that generate steady, passive income.

However, there are strict rules regarding personal use of these properties. You cannot live in or vacation at any property owned by your IRA. Furthermore, you cannot rent the property to yourself or close family members, including your spouse, children, grandchildren, parents, or grandparents. However, you can rent it out to more distant relatives, such as siblings, cousins, or even friends.

One popular strategy is to purchase a property with your IRA, rent it out for income until retirement, and then use it as your residence after you retire.

3. Understand How Income Works in an IRA

All income generated by the property must remain within the IRA until you retire. You cannot use the income for your personal benefit prior to retirement. This means that if you sell the property, any profits must stay in your IRA. Similarly, all expenses related to the property—such as taxes, insurance, and maintenance—must be paid by the IRA itself.

Failing to follow these rules could result in your IRA being disqualified, triggering income taxes on the entire property’s value along with a 10% early distribution penalty.

4. Keep the Standard IRA Rules in Mind

It’s important to remember that using a self-directed IRA to purchase real estate doesn’t change the general rules governing IRAs or Roth IRAs. This includes rules about required minimum distributions, taxation, beneficiaries, and more. While the upside of investing in real estate through your IRA can be significant, it’s crucial to understand the responsibilities and restrictions involved.

Investing in real estate through a self-directed IRA offers the potential for long-term growth and income, but it’s essential to be well-informed and follow the rules carefully. Consulting with a knowledgeable financial advisor or tax professional is always a good idea to ensure you’re maximizing the benefits while staying compliant with IRS regulations.

Looking to chat with other investors in Baton Rouge who have done this exact process? Join us every 1st Tuesday at Redstick Social at 6:30pm to get connected with dozens of other like-minded real estate investors!