Owning real estate in an IRA is often classified in its own category when it’s really a type of investment you can make with a 401(k) or self-directed IRA. Recently, many people have started asking about making these investments due to the inordinate amount of foreclosures and short sales of homes available on the market.

The truth of the matter is that a real estate IRA has been around about as long as a traditional IRA or a self-directed IRA. In 1974, the Social Security Administration approved ERISA to help supplement Social Security retirement funds. Ironically, self-directed IRAs have been around for over 30 years, but many people still treat them like they’re a new trend.

For this reason, it’s a good idea to do a lot of research before choosing your custodian or trustee. Many self-directed IRAs are not truly self-directed. Options may be limited, and you’ll need to make sure you’re not restricted from real estate in an IRA. If they have been conducting these types of transactions for decades, they should help ensure that the documentation is submitted in accordance with IRS rules and regulations.

When investors are first considering real estate for retirement funds, they often have a lot of questions. The first thing to remember is that many of the rules that apply to an IRA will also apply here.

There are a few additional things to consider with real estate in an IRA.

1. You may not purchase real property for your IRA that you or any disqualified person owns. Disqualified persons include anyone in their lineal descent, including children, grandchildren, great-grandchildren, parents, grandparents, and great-grandparents. If you previously owned it, you cannot buy it. This is what the IRS refers to as self-dealing and will penalize anyone who does it.

2. You cannot participate in the “indirect benefits” of your real estate IRA. That means you or any disqualified member can’t use a vacation home. Also, office space is not rented in a commercial investment property. Your property is earmarked for retirement for your future benefit, not now.

3. All real property must be titled as a separate entity from you. You must title your IRA account and have all documents reflect the name of the retirement plan instead of your personal name. You could expect delays if something is not titled as such.

4. All expenses and income must be through the IRA. You are not allowed to personally hold funds in your hands. In addition, all expenses, including property taxes, homeowners association dues, bills, and maintenance or improvements, must be deducted directly from your account.

5. Your real estate purchase can be done in a number of ways. Your options don’t end with an outright purchase of your self-directed retirement plan funds. You can also participate in partnerships (with the exception of S corps) or a loan that does not use SDIRA as collateral.

What we have covered in this article are just a few quick tips to keep in mind. Before making any investment, and especially a self-directed one, you should always do your research and ask questions. Your passive custodian is there to help ensure you know the answers to the rules and regulations, but you still need to educate yourself about IRA real estate ownership. Ultimately, you are in charge of creating lasting wealth for yourself and your family.