Can I Buy Land With My IRA? The Process and Rules

Individual Retirement Accounts (IRAs) are a fundamental tool for Americans to save and invest for retirement. These accounts offer tax advantages, allowing investments to grow either tax-deferred or tax-free. While IRAs are typically associated with traditional assets like stocks, bonds, and mutual funds, their investment landscape can be broader.
Diversifying retirement portfolios with alternative assets is possible. Real estate, including land, is one such alternative investment that can be held within an IRA. However, investing in real estate through an IRA involves specific structures and adheres to Internal Revenue Service (IRS) regulations that differ from typical brokerage account investments. This allows individuals to benefit from real estate appreciation and income within their tax-advantaged retirement savings.

Understanding Self-Directed IRAs for Real Estate

A Self-Directed IRA (SDIRA) is an IRA account where the account holder, rather than a financial institution, makes investment decisions. Unlike standard IRA custodians that limit options to publicly traded securities, an SDIRA custodian specializes in facilitating a wider array of alternative assets, including real estate, private equity, and precious metals. This distinction lies in the custodian’s administrative capabilities, not the IRA’s fundamental nature.

An SDIRA custodian is necessary because traditional custodians are not equipped to handle the administrative and compliance requirements of non-traditional assets like land. They lack the infrastructure to properly title, value, and report these less liquid investments to the IRS. An SDIRA custodian possesses the expertise to manage the complexities of holding alternative assets within a tax-advantaged retirement account.

The SDIRA custodian’s role is to hold account assets, process transactions as directed by the account holder, and ensure compliance with IRS regulations. While the individual directs investment choices, the custodian executes these directives, ensuring the legal and tax integrity of the transaction. This arrangement maintains the separation required by law between the individual and the retirement funds.

Various types of IRAs can be self-directed, including Traditional, Roth, Simplified Employee Pension (SEP), and Savings Incentive Match Plan for Employees (SIMPLE) IRAs. The self-directed nature pertains solely to the expanded investment options available through the specialized custodian. The underlying tax treatment and contribution limits of the specific IRA type remain unchanged.

Real Estate Investment Rules for IRAs

Investing in real estate within an IRA is subject to IRS rules designed to prevent self-dealing and ensure the account remains a retirement vehicle. Regulations in IRS Code Section 4975 outline prohibited transactions. These rules prevent the IRA owner from personally benefiting from retirement funds before retirement age, or from engaging in transactions that unfairly benefit disqualified persons.

A prohibited transaction occurs when the IRA holder, or a disqualified person, directly or indirectly engages in certain activities with the IRA’s assets. Disqualified persons include the IRA owner, their spouse, ancestors, and lineal descendants, as well as any entities controlled by these individuals. For instance, purchasing land for personal use, such as building a vacation home or a primary residence, is a prohibited transaction.

The land held within an IRA must be acquired and held solely for investment purposes. The property cannot be used for any personal benefit by the IRA holder or any disqualified person, either currently or in the future. Activities such as living on the land, deriving personal income from it outside the IRA, or using it for a business operated by a disqualified person are forbidden. Such actions jeopardize the IRA’s tax-advantaged status.

Violating these rules has consequences, as the IRA may lose its tax-exempt status. If a prohibited transaction occurs, the entire IRA account may be considered distributed as of the first day of the year the transaction took place. This deemed distribution is then subject to income tax at ordinary rates, and if the IRA holder is under age 59½, they also face a 10% early withdrawal penalty.

The IRA, not the individual, legally owns the land. All income generated from the land, such as lease payments or timber sales, must flow directly into the IRA account. All expenses associated with the land, including property taxes, maintenance costs, and insurance premiums, must be paid directly from the IRA’s funds. No personal funds of the IRA holder or disqualified persons can be used for these expenses or receive income from the property.

Steps for Acquiring Land Through an IRA

The process of acquiring land through an IRA begins with establishing and funding a Self-Directed IRA. An individual must open a new SDIRA account with a specialized custodian and transfer existing retirement funds from another IRA or qualified retirement plan, such as a 401(k), into this new account. New contributions can also be made directly to the SDIRA.

Once funded, the individual identifies a suitable land investment that aligns with their objectives and complies with IRS regulations. This involves researching properties and conducting due diligence. The chosen land must be solely for investment purposes, avoiding personal use or benefit by the IRA holder or disqualified persons.

After selecting the property, the individual informs their SDIRA custodian of the intended investment. The custodian reviews the proposed transaction to ensure it adheres to IRS rules, verifying details like the absence of disqualified persons and proper titling. This review is an important step in maintaining the IRA’s tax-advantaged status.

The SDIRA custodian executes the land purchase directly, using funds held within the IRA account. The individual does not personally purchase the land; the custodian acts on their behalf. The title to the land is held in the IRA’s name, typically appearing as “[Custodian Name] FBO [For Benefit Of] [Your Name] IRA.”

All income generated from the property, such as lease payments or timber sales, must flow back into the SDIRA. All expenses related to the land, including property taxes, maintenance costs, and insurance premiums, must be paid directly from the IRA funds by the custodian.

When selling the land, the SDIRA custodian facilitates the transaction. Proceeds are returned directly to the IRA account, remaining tax-deferred or tax-free. The individual continues to direct the investment of these funds within the IRA until retirement.