Investing in Real Estate with a Health Savings Account

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An increasingly common offering by employers and health care insurance providers, Health Savings Accounts (“HSAs”) continue their decade-long upward momentum in consumer adoption. However, even now and despite the growing use of education and user tools, as well as multiple periods of HSA-qualified plan enrollments, HSA versatility still holds some surprises. For instance, how many know they can invest in rental property with an HSA?

HSAs: Designed with your Health in Mind

HSAs were created to encourage account holders to save for future medical expenses, as well as address current ones. The rules and tax benefits of HSAs were designed to match those of retirement accounts familiar to many taxpayers, namely IRAs, 401(k)s, etc., thus allowing HSA owners to also grow their accounts through investment holdings appropriate to their financial goals. However, while retirement plans help individuals save for the overall financial future, Health Savings Accounts specifically target saving for medical expenses, which, incidentally, compose a significant portion of retirement expenses (see the Employee Benefit Research Institute study here). In fact, the tax advantages of an HSA can exceed those of tax-deferred retirement plans when used for medical expenses. While retirement plan participants typically pay taxes at withdrawal, HSA holders may never have to pay taxes. This can result in significant tax savings through tax-deferred contributions and tax-free distributions for qualified medical expenses.

HSAs distinguish themselves in this regard, but they also share a key similarity with retirement plans that most account holders may not know - HSAs can buy homes and rent them out, just like IRAs.

Most of us will eventually learn about real estate investing. Some will begin as renters and may later become property owners. A sizable (but potentially profitable) minority may become owner-lessors (landlords). Many investors prefer investments they can touch, manage, and understand. Others want to diversify their portfolios with real estate and generate returns that aren't correlated with Wall Street.

Unbeknownst to many, rental property investments are allowed in IRAs and HSAs. While most IRA custodians limit their clients to publicly traded securities as a matter of corporate policy (as well as to maintain focus by managing the scope of their products and services), the list of disallowed assets by the US tax code is actually quite short. Investors can purchase and hold most anything NOT on the list. And, in fact, a growing number of investors have been purchasing rental property with their IRAs for more than two decades. A smaller group has discovered, under the same tax rules, that they can allocate their HSA dollars toward investment properties.

HSAs can even partner with other investors (or their IRAs, HSAs, etc.) on the same real estate transaction. With this type of capital pooling, an HSA need not contain a large balance to enter the real estate market. IRA and HSA account holders can also obtain mortgages on behalf of their account-owned investments, just as they can when purchasing a home.

As healthcare costs rise and investors incorporate health savings into their overall retirement savings plan, taxpayers and their financial advisors will continue to explore available opportunities to achieve their goals. Real estate remains the largest asset class and often a family's single largest investment, a relationship that can both provide familiarity and also prompt new considerations for portfolio diversification. By coupling the earning potential of investment rental properties with the tax-free benefits available through Health Savings Accounts, investors have new angles to investigate in securing their financial futures.