How To Buy Your Retirement Home Ahead Of Time Using A Self Directed IRA

Chances are you've been steadily growing your IRA for quite some time. Did you know that you can buy a retirement home with a Self Directed IRA (SDIRA)?

Yep, it's true. But there are a few things you need to know first.

If you have any other IRA besides a SDIRA, you can only hold investments. You can't just go buy a home with your IRA and live there. However, with a SDIRA, you can buy an "investment property", which you can later distribute and use personally.

Let's break this strategy down.

Steps To Using a Self-Directed IRA to Buy a Retirement Home

If you are seriously interested in using your SDIRA to purchase a retirement home, then know that it works in two phases.

First, your IRA purchases the property and owns it as an investment until you decide to retire. (You need an SDIRA for this.) Second, upon your retirement (after age 59 ½), you can distribute the property via a title transfer from your SDIRA a regular IRA. This allows you to personally use the home and benefit from it personally. Before you go out and buy your future retirement home, you should consider a couple of factors.

Avoid Prohibited Transactions

Be careful to avoid those dreadful "prohibited transactions". The rules in place currently do not allow you, the IRA owner, or certain family members to have any use or benefit from the property while it is owned by the IRA.

The IRA must hold the property strictly for investment. The property may be leased to unrelated third parties, but it cannot be leased or used by the IRA owner or prohibited family members (kids, siblings, parents, etc). Only after the property has been distributed from the self-directed IRA to the IRA owner may the IRA owner or family members reside at or benefit from the property.

You Must Distribute The Property Fully Before Personal Use

The property must be distributed from the IRA to the IRA owner before the IRA owner or his/her family may use the property. Distribution of the property from the IRA to the IRA owner is called an “in kind” distribution, and results in taxes due for traditional IRAs.

For traditional IRAs, the custodian of the IRA will require a professional appraisal of the property before allowing the property to be distributed to the IRA owner. The fair market value of the property is then used to set the value of the distribution.

For example, if your IRA owned a future retirement home that was appraised at $250,000, upon distribution of this property from your IRA (after age 59 ½) You would receive a 1099-R for $250,000 issued from your IRA custodian to you.

One of the drawbacks of this strategy is that distribution taxes can be high. You might prefer to take partial distributions of the property over time, holding a portion of the property personally and a portion still in the IRA to spread out the tax consequences of distribution.

However, that would be a tiresome process, as you would have to appraisals each year to set the fair market valuation. While this can lessen the tax burden by keeping you in lower tax brackets, you and your family still cannot personally use or benefit from the property until it is entirely distributed from your IRA.

Bottom Line: Play By The Rules With Your Self-Directed IRA

Remember that you should wait until after you turn 59 ½ before taking the property as a distribution, as there is an early withdrawal penalty of 10% for distributions before age 59 ½.

While this strategy is possible, it is not for everyone and certainly is not easy to accomplish. Few things worth doing in life are. SDIRA investments come with rules, and self-directed IRA investors should make sure they understand those rules. Remember, you can't use your retirement home for personal use until after its been distributed and you may or may not end up paying lots of taxes.

Last Updated: 
November 10, 2017

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

Learn How To Achieve Total Asset Protection While Growing Your Professional Network

Ready to know more than your attorney? Join our community platform where you'll get immediate FREE access to all our best educational resources for real estate investors. Including 8 Masterclasses, group mentoring replays, and much, much more.



Join thousands of real estate investors in all 50 states as they enjoy exclusive content, special promotions, and behind-the-scenes access to me and my guests. No spam, ever. Just great stuff!




Do you have asset protection questions? We can help!


© 2023 - Royal Legal Solutions