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Buying Real Estate In An Self Directed IRA or Solo 401k allows you to use your own expertise to make money. Most investors stick with ordinary types of investments in their retirement accounts, opting for stocks, bonds, mutual funds, and ETFs. But while those may be the most popular assets you’ll find within retirement accounts, they definitely aren’t the only ones allowed. In fact, IRAs can handle a wide variety of assets, including real estate.

There are quite a few reasons why buying real estate in your self directed retirement plan whether it is a traditional IRA, Roth IRA, Solo 401k (or sometimes called Individual K), SEP, SIMPLE, 403b, etc. If you want to invest in real estate, it’s hard to find stocks that give you the same type of upside potential that owning a particular property gives you. You could buy publicly traded REITs, but those are huge companies with holdings nationwide and you really have no control of what “they” are buying for the portfolio.

As Warren Buffet says “I will tell you how to become rich. Be fearful when others are greedy. Be greedy when others are fearful.”

When you combine the advantages of a self directed IRA or Solo 401k with your knowledge of real estate, you earn tax-free/tax-deferred returns on your investments. The rate of return on your investments is based on your knowledge and expertise in real estate and not based on the ups and downs of the stock market. This is true self directed wealth! In addition, imagine not having to pay taxes right away—or ever—on your real estate deals. Instead of paying 25% or 35% of your profits to the government in taxes, you keep it with the right plan.
Additional advantages of the real estate IRA or 401k include the power of compound interest, a reduction of taxable income, asset protection, and estate planning depending on the plan you choose.

Here’s a partial list of real estate-related investments that you can make in a self directed retirement plan:

Raw land
Single-family homes
Commercial property
Apartments
Duplexes
Condos/townhomes
Mobile homes
Real estate notes
Second mortgages
Partial notes
Real estate purchase options
Tax liens certificates

All expenses and income related to property owned by your self directed retirement plan must be paid from and returned to the IRA. Here are some key points to remember about property income and expenses:

1. All profits/income related to the investment must return to your self directed IRA (see diagram below)
2. Renters/Payers must make out checks to your self directed IRA, not to you personally. Co-mingling of funds could be considered a prohibited transaction.
3. All expenses related to the investment must be paid from your IRA proportionate to your IRA’s investment in that property.

4. When you’re ready to sell the property, all proceeds from the sale are tax free and go back into your IRA.

A prohibited transaction, including prohibited real estate IRA investments, can bring into question the tax-deferred status of your account, potentially resulting in the disqualification of your IRA and severe tax consequences. Therefore, you must follow the simple rules (IRS Publication 590).

The following are a few examples of some prohibited transactions with a self directed IRA:

Selling property to it that you already own.
Borrowing money from it (certain 401k you can borrow money).
Can not use IRA or 401k as collateral (i.e. security for loan).
Buying property for personal use with IRA 401k funds.