STRATEGY
IRA
Funding Your First Investment USING YOUR IRA TO FINANCE A REAL ESTATE PURCHASE
by Michael Jordan
Traditional IRA To qualify for an IRA exemption, you need to be a first-time homebuy- er. This can be a very broad definition of what exactly a “first-time” home buyer is. The IRS can qualify you (and your spouse if they also have an account) if you haven’t owned a principal residence at any point in the last two years. Owning a vacation home or taking a part-time share on a property still qualifies you for an exemption. A qualified buyer can withdraw up to $10,000 from their account to use as a down payment for their purchase without suffering the 10 percent early withdrawal penalty. This applies for each buyer. Mean- ing, if you and your spouse have IRA accounts, $20,000 can be withdrawn for you to use on your investment. Take note that you still have to pay for regular income tax upon withdrawal. Another way to be exempted from the penalty is when you already own a home and you want to help people close to you so they can purchase a property. This would only apply to your eligible child, grandchild, or parents who want to buy a home. So if you want to help out, you can with-
here are numerous ways to acquire investment proper -
the money already inside your IRA. You will allocate the funds toward the purchase of the real estate. The purchase itself is the same process as buying any house. After you close, the property will be in your IRA. The IRA owns the property. Another way to use your IRA money is as a lender. You may find an opportunity to lend money to someone who wants to buy a property. The property becomes the collateral for the loan. You actually use your IRA/401(k) like a mini- bank. When you use your IRA in a real estate transaction, any income, or profit you make on it is treated with the same tax deferred—or better yet—tax-free advantages associat- ed with IRAs. This goes for rental income or interest you earn if you lend money. OTHERWAYS TOUSEYOUR IRATO BUYREAL ESTATE While it is true that there are penalties if you take withdrawals from your IRA before age 59 ½, there are ways to avoid these fees when purchasing a home.
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ties. The most common ones are through cash, financing through a lender, or getting a loan from the bank. As common as they can be, these three are not your only choic- es. Another option is through the use of your IRA. You may have never thought about using your IRA to fund a real estate purchase. Or, you think it will be too complicated. That’s under- standable but with due diligence coupled with a touch of profession- al guidance, you can learn how to utilize your IRA to buy investment properties. An IRA is a popular retirement tax tool. Many people have invested money into an IRA, either directly, or by rolling an old 401(k) into one. An IRA is just a tax-advantaged holding entity that you put an investment into. Inside your IRA, you may be in - vested in cash, mutual funds, individ- ual stocks, or bonds, even precious metals, notes and mortgages, and real estate property. To fund the purchase of an invest - ment property through your IRA, you do not use new money. You use
64 | think realty magazine :: august 2020
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