Living in Your IRA-Owned Real Estate

Hopefully, your account-owned rental property has served your retirement plan well. What if you’ve decided you really want to retire and start living in your IRA-owned real estate?

Ready to invest in real estate with your self-directed retirement plan? Click here to begin our easy online new account application.

If the house was purchased by your Roth IRA, you’ve held the account for five years, and you’re at least 59 ½ years old, it’s yours to distribute to yourself with no tax or penalties.

But what are your options if your real estate assets are held in a Traditional IRA or another such pre-tax account?

You can distribute the house once you’re 59 ½ without paying any premature withdrawal penalties. However, you’ll owe income taxes on the dollar amount (in this case, the property value) of your withdrawal. Naturally, since we’re talking about thousands of dollars, this may be costly. However, you have a few options:

1) You can distribute your IRA’s holdings a little bit at a time

For example, at age 59 ½, you could begin distributing 10% of the property from your IRA each year. If you distributed 10% in year one of such a schedule, your IRA would still own 90%. You’ll need to arrange with the title company so that the ownership share is properly reflected accordingly each year. You’ll still be constrained from using the property personally until it is entirely distributed from the IRA. You can, on the other hand, spread the tax burden from distributions over a 10-year period.

Keep in mind that this new ownership structure will change your monthly cash flows. You will personally be entitled to 10% of earnings and responsible for 10% of expenses. These proportions would need to be honored since there are now two investors: you and your IRA.

2) You could consider converting a portion of your IRA (including that real estate asset) to a Roth IRA

Yes, you’ll pay income tax on the amount you convert. This could make sense if you anticipate continued or growing IRA income before reaching age 59 ½. You could pay some tax now on a smaller amount instead of paying tax on the entire property.

You could also convert a fractional share from your IRA to a Roth IRA each year so that your Roth IRA will eventually own the entire property. Then, once you’re 59 ½ years old and once the Roth IRA reaches five years of age, it’s available to withdraw free from penalty or tax.

3) You may elect to begin distributing shares of your property before retirement age by using the 72(t) method

The IRS grants the 72(t) method (substantially equal payments) as an exception, which enables one to avoid the penalty for early IRA withdrawals.

The 72(t) exception offers a choice of methods, which you can use to tailor the timeline of your distributions. All are based on your life expectancy (or, if you elect, on the joint life expectancy of you and your beneficiary) and whichever method you choose must be continued for at least five years or until reaching age 59 ½.

Please don’t hesitate to give us a call at 877-742-1270 or send us a message through the Client Portal if you ever have questions or concerns.

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