When discussing being able to purchase real estate in an self-directed IRA, alsk known as a real estate IRA, one of the first questions I typically hear is “can I purchase a property that I eventually wish to retire to?” Ultimately the answer is yes; unfortunately, it isn’t as easy as kicking your renter out and moving in once retirement hits.
Once an investor reaches retirement age, he or she is still subject to all prohibited transactions as long as the IRA continues to have ownership of the property; therefore, the first step is to get the property out of the IRA. In order to do this, a value of the property must be determined. This means getting an appraisal of the property to determine its fair market value. Remember, it is likely the IRA has held this property for some time, and appreciation has likely occured. To determine fair market value, a third-party appraisal is the most generally accepted choice.
Once a value for the property has been determined, the investor now has the ability to take that property as a distribution. For example, the property is appraised at 250k. In order for the IRA holder to move into that property, they would need to take a 250k distribution from the retirement account and pay all applicable taxes and/or distribution penalties (if the investor is younger than 59.5 years old).
Because of the potential tax burdens, many people choose to invest in properties for investment purposes only. One alternative to taking this exact property as a full distribution is to take a partial distribution and use the funds to make a down payment on a property in a similar area. While it is not the same as purchasing your dream home with your retirement account, this option gives the investor a chance to negate any appreciation in the area, and avoid a massive tax hit on a full distribution.
