There are a number of limitations on what you can invest in using an individual retirement account (IRA), usually to keep people from abusing the tax deferral that it offers. This can seem to quash any chance of being able to invest in real estate with an IRA, but it actually doesn’t. There is a way around it, but it can be tricky and has a few different stipulations.
The first stipulation is that the only way to buy real estate with an IRA is to do it with an IRA non recourse loan. A non recourse loan agreement works like this: the borrower (or owner of the IRA) puts up some real property for collateral. The non recourse lender provides the funding, but has no recourse over any other property aside from the agreed upon collateral if the borrower defaults on the loan.
An IRA cannot just buy any type of property, which is another stipulation. An IRA can only buy property that will generate a source of income. Some examples of these are commercial property (to rent as offices or storefronts), multifamily property (like a home divided into apartments), an apartment building, and agricultural land (to rent out to support crops or livestock).
Another one of the main stipulations of using self directed IRA to buy real estate is that the purchase cannot in any way benefit the owner of the IRA that was used to get the non recourse mortgage loan. This means that the owner cannot collect any rent made from the property — those funds must go back into the IRA. Additionally, the owner and the owner’s friends and family are not permitted to use the property at all.
Do you have any questions about the way non recourse loan agreements work? Let us know in the comments.