Buying a House Within My IRA

Buying a house within an IRA

I’ve taken the plunge. I’m in the process of buying a house within my IRA. (I’d debated a house vs. a condo a while back, and had come down squarely on the side of “no idea what I’ll do”.)

Originally I’d thought I would look for either a house to flip or a condo to rent out, but the price point I had in mind made that a no-go for this area. Instead, I’ve made an offer on a house to renovate, hang on to, and rent out — and the offer was accepted. (That’s the house, pictured above.)

What I’ve learned so far

The main thing I’ve learned so far is that it’s a whole lot slower to buy a house using a self-directed IRA than it is to just buy a house. That’s because in order to avoid running afoul of the IRS rules (and disqualifying your IRA, ouch) everything is run through a custodian.

That means that the custodian has to sign all of the zillions of agreements and disclosures required, not me. And of course, it takes them time to do so. So while my IRA is doing a cash purchase, it’s actually felt more complicated than when I’ve personally bought real estate with a mortgage. The process is s-l-o-w, and requires patience on the part of all participants — especially vendors who have to fill out their invoices in a certain way and wait for a check or wire transfer to be sent to them from the IRA. So, you’re less likely to get the kind of deals you might be able to when using cash outside of an IRA.

The house

The house my IRA is buying is a 2bedroom with a detached garage in a nearby city. It’s also pretty old (built in the 40s), currently leased at a good rate (woohoo!), in a good location, surrounded by houses that look better than it does, and at a bargain-basement price.

The downside? It’s got a LOT of issues, and it’s being sold as-is. (Hence the price.) The issues are kind of huge too, and several of them will need to be addressed immediately after closing. Then there will be more items (such as re-doing the only bathroom) that will need to be addressed not too far down the road. All that presumes they don’t find any unpleasant surprises while doing the work, which wouldn’t be unheard of in a house of this type and age.

But, I’m hopeful this will turn out well. Obviously I believe it will be a good investment, especially based on the rent it’s currently getting. Time will tell. I’ll keep you posted :)


  • I think it is important to point out that your cash flow and appreciation (basically any money you make) will be taxed at ordinary income tax rates when you take the money out of your IRA, plus losses can’t be written off. Had you purchased the house outside of the IRA, you would owe 15% capital gains today (presumably much lower that ordinary rates in retirement) could write off losses, and take advantage of depreciation of an investment property.

  • Converting to a Roth won’t change the taxation disadvantages of buying real estate in an IRA. You will still pay ordinary income tax rates to do the conversion, but could have paid capital gains rate outside the IRA. Also doesn’t change issues with depreciation and losses.

    • No, it won’t change the possible tax advantages or disadvantages of money I’ve already contributed to my traditional IRA and the real estate investment I’m in the process of making with it. I contributed that money to my 401k when in a fairly high tax bracket and reduced my taxable income at that time, and then rolled it into an IRA.

      If I do convert it to a Roth, it will be when I’m in a much lower tax bracket, so I’ll pay less in ordinary income taxes upon conversion than I would have had I paid taxes when I made the money and not contributed to my 401k. And if I leave it as a traditional IRA, presumably I will be making less in retirement than while employed, although I’d be happy if that turned out to be untrue.

      Capital gains taxes would only need to be paid if and when I sell the house, which I intend (and hope) to keep as a long-term rental. Losses…well, let’s hope I don’t have a loss, although realistically that’s probably more likely.

      But, let’s pretend my husband and I are retired today, and I’ve sold the house within my traditional IRA and made a capital gain of $20,000. Let’s also pretend our income is $72,500 this year while we are retired.

      Based on the IRS 2013 tax table, we’d pay 10% on the first $17,850, 15% on the next $54,650, and then 25% on next $20,000 (that capital gain.) That would bring our imaginary effective tax rate to 16% on the entire $92,500.

      There are just a whole lot of variables, what ifs, and the ability to foresee the future required before I could be certain I was doing the optimum thing either way.

      It’s definitely good to think about the possibilities, and I’m glad you brought this up. Buying real estate within an IRA is not for everyone, and it could be I’ll find out it’s not for me either. But right now I’m looking forward to having the house renovated.