Purchasing real estate with IRA funds and living in it NOW

We get asked all the time, “Can I use my IRA to purchase real estate that I can actually live in?”  There is not a simple “yes” answer to this question, but it can be done.

The IRS has a rule called a 72T Distribution.  Using this rule it is possible to purchase real estate through your IRA and live in it now.  Here’s how it works.

From the IRS Publication 590

You can receive distributions from your traditional IRA that are part of a series of substantially equal payments over your life (or your life expectancy), or over the lives (or the joint life expectancies) of you and your beneficiary, without having to pay the 10% additional tax, even if you receive such distributions before you are age 59 ½.  You must use an IRS-approved distribution method and you must take at least one distribution annually for this exception to apply.

The payments under this exception must generally continue until at least 5 years after the date of the first payment, or until you reach age 59 ½, whichever is later.  If a change from an approved distribution method is made before the end of the appropriate period, any payments you receive before you reach age 59 ½ will be subject to the 10% additional tax.

How some people choose to do this is to purchase an annuity with IRA funds that will guarantee a series of payments which are taken as distributions.  This annuity is used to pay for the real estate.

There are differences between this method and purchasing real estate to be held by your self directed IRA.  These include:

This is NOT an IRA investment.  The real estate is held outside of your IRA.  Sale of the property, unless it is your primary residence, will follow all the rules of any investment sale.

Your IRA is being liquidated to make the distribution payment.  You may not put those funds back into the IRA after taking them out.

You will be taxed on the distribution at your current tax rate rather than at your tax rate at retirement.

Using an annuity contract will not build your IRA within a tax-deferred account.

However, an annuity is not required.  You can do a 72T Distribution from inside an IRA.  By making the investments from inside a self-directed account you have maximum flexibility rather than locking yourself into the purchase of an annuity.

Let’s look at an example.

• You purchase a second home condo from within your self-directed IRA for $150,000
  
  
• Your self-directed IRA rents the condo for $1000 per month with $900 per month cash flow going back into the IRA.
  
  
• You and your custodian determine that the required monthly distribution for a 72T will involve taking $900 per month from your IRA account.
  
  
• You use the $900 to make payments on your “second home” mortgage.
  
  
• The condo appreciates at a rate of 5% per year, making your IRA worth $190,000 in five years even while paying out the required distributions.
  
  
• Your IRA is going up in value because is contains real estate.

You have and use your second home now.

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