While most people recognize real estate as an investment, many savvy investors are leveraging qualified retirement accounts like IRAs to acquire real estate as an appreciating or revenue-generating asset for long-term financial freedom.
It’s crucial to understand the tax implications, legal requirements, and various complexities of purchasing Lubbock real estate within your IRA before making this powerful wealth-building move.
So, let’s explore some essential tips on buying real estate with your IRA in Lubbock Texas!
Tips on Buying Real Estate With Your IRA in Lubbock
If you haven’t established a self-directed IRA yet… your first step is to consult with your trusted financial advisor to identify a reputable and cost-effective self-directed IRA custodian. Alternatively, connect with us and we’d be happy to recommend some excellent self-directed IRA companies that Electrum Properties has successfully collaborated with in the past.
Open a Self-Directed IRA
To begin your journey toward acquiring investment properties in Lubbock through your IRA, you’ll need to establish a “self-directed” IRA first. Connect with a qualified financial advisor or trusted fiduciary who can serve as your IRA custodian. For straightforward guidance without hidden agendas, consider working with a fee-only financial advisor who can efficiently set up your account. Be aware that commission-based advisors might discourage real estate investments within your IRA since tangible assets typically don’t generate substantial commissions for them.
Types of Properties You Can Buy With Your IRA and Rules
Your IRA can build wealth through various real estate investments, including residential, commercial, and industrial properties, as well as undeveloped land. At Electrum Properties, we’ve seen investors achieve financial freedom by strategically acquiring parking lots, storage facilities, and other low-maintenance properties that deliver steady cash flow while solving real estate challenges for sellers.
IRS regulations prohibit using your IRA to purchase property where you currently live or vacation – you cannot stay even a single night in the property. This restriction cannot be bypassed by “renting” from your IRA or leasing to immediate family members (spouse, children, grandchildren, parents, or grandparents), nor can you buy property from close relatives. However, renting to siblings, cousins, or friends is permissible. Many Electrum Properties clients implement a win-win strategy: purchasing property through their IRA, collecting rental income until retirement, then occupying the home after retiring – creating both immediate cash flow and future housing security.
How Does Income Work With Real Estate In An IRA?
The income generated in your IRA cannot be used for your “personal current benefit.” This means all revenue produced by the property must remain within the IRA until retirement. When selling the property, all profits must stay within your IRA. Additionally, property taxes, insurance, improvements, and other property-related expenses must be paid from the IRA itself. Failing to follow these regulations could disqualify your IRA, subjecting you to income taxes on the entire property value, plus a 10% early distribution penalty.
It’s important to note that all distribution rules associated with an IRA (or Roth IRA) including taxation, required minimum distributions, beneficiaries, and other factors remain unchanged when using a self-directed IRA to purchase property. Real estate in your IRA can offer significant advantages for solving your retirement challenges, but knowing exactly what to expect is essential for success.