Rental Property Investments

Written by Johnny Kitchens
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Investing in rental properties can be an excellent means for building wealth within an IRA. Not only does the IRA gain value from the appreciation of the property's value, it also gains from the rental income. One thing to remember is that regulations regarding rent control can create declining rental revenue when compared with inflation in certain jurisdictions. With the tenant turnover in rental properties, this often never comes into play, but it is something to consider.

Another consideration regarding rental properties, specifically those owned within IRAs, is that rental properties always require certain maintenance, management, and repair costs. In the case of those owned by IRAs, it is important to pay for all such expenses out of the IRA and that all proceeds from the property go directly into the IRA. Failure to comply with those rules can open your IRA up to some major fines and additional taxes.

In the case of a piece of property that you purchase with your IRA and plan to rent until you retire, you will have to meet certain criteria before such a move will not trigger penalties. (The rules state that you cannot live on property owned by your IRA.) Once your IRA reaches a certain age and the property has been in the IRA for a certain period of time, you can take the property out of the IRA as a distribution (at the then-current value) and live there penalty-free.

Managing a Rental Property in Your IRA

To own real estate in an IRA, it is almost always necessary to open a self-directed IRA and it is highly recommended that you maintain checkbook control over it. Having checkbook control allows you to pay such expenses that are associated with the property directly from your IRA funds without having to go through your IRA's custodian. Gaining checkbook control generally means forming a limited liability company (LLC), though there are other means for doing so.


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