For some reason, many people are under the false assumption that they can only invest in ETFs, mutual funds, and stocks with their retirement accounts. But nothing can be further from the truth. As a matter of fact, the IRS allows you to use 401(k) plans and IRA accounts to fund alternative investments including real estate.

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Even more important, the rules of the IRS allow a person to invest in just about any type with the exceptions being collectibles, life insurance, or an investment with a disqualified person.

Believe it or not, there are some big advantages to buying real estate through your retirement account whether it’s an IRA or a 401(k). The biggest advantage of all is that any gains made with this type of investment are tax-deferred until you make a distribution, or in the case of a Roth IRA account it’s completely tax-free since you are using after-tax money to invest.

Common Retirement Investment Accounts Used to Purchase Real Estate


As you can imagine, certain retirement accounts are more popular for real estate investing than others. In fact, two really stand out among the crowd.

The most popular options include employer-sponsored 401(k) plans and self-directed IRAs. But keep in mind that the wide majority of 401(k) plans do not offer the possibility to finance real estate transactions. That’s why out of the two, the self-directed IRA is increasingly more popular for real estate retirement purchases.

It may seem difficult on the surface, but it’s actually very easy to open a self-directed IRA. It’s inexpensive, relatively quick, and it will only take a few days of your time to set the account up and have it fully operational for real estate investing.

More than anything else, the big challenge to buying real estate with your retirement accounts is there are prohibited transaction rules by the IRS that you need to pay very close attention to. We’ll take a look at a critical IRS code and other pertinent tips to make real estate investing using retirement funds as painless as possible.

Internal Revenue Code Section 4975

In IRC Section 4975, you as a retirement account holder are not allowed to make an investment using your retirement savings that will indirectly or directly benefit a disqualified person or yourself. A disqualified person includes a related entity or a retirement account holder descendent.

As part of this code, you are also prohibited from performing services connected to your retirement investments, you cannot guarantee a loan against your retirement account, you cannot offer anyone credit using your retirement account or use your retirement as credit in return, or perform a forbidden transaction using the retirement account. These are all prohibited conflicts of interest.

And based on the standard rule, if you were to perform a prohibited transaction you’d have to pay a 15% penalty tax based on the amount of the initial transaction. This penalty is imposed on you or the disqualified person when a prohibited transaction occurs.

As you can see, the rules can get a bit tricky with the IRS. Since we’d like to help you navigate the prohibited transaction rule that they have put forth, we’re going to provide tips to make it possible for you to purchase real estate investments correctly while using your retirement account funds.

Our Top Tips for Investing in Real Estate Using Your Retirement Accounts

To make sure your retirement investments stay on the up and up, you have to follow the rules and guidelines regarding the IRS rules. Our top tips to help you navigate these confusing waters include:

  • Making repairs to real estate – if you purchase real estate using your retirement account, every tax, repair, and expense generated through this property needs to be paid for using funds in your retirement account. You cannot use any of your personal funds or any of funds gathered from a disqualified person otherwise you’d be in violation of the IRS rules.
  • Purchase price and deposit – if you intend to buy real estate using the funds from your retirement account, all deposit money and the entire purchase price needs to be made using the funds from your retirement account and nowhere else. You cannot get funds from your personal bank or investment accounts and you cannot use funds from any disqualified person because you’d violate the rules set forth by the IRS.
  • Using additional funds for property upkeep, home improvements, etc. – if you intend to use additional money to pay for things like home improvements and upkeep for the property, this money has to come from your retirement account. The only other exception to the rule is to get the money from a person who is not disqualified under the IRS rules.
  • Real estate financing – if you need to use money to finance a real estate transaction, you could only use nonrecourse financing. What is a nonrecourse loan? It’s a type of loan that doesn’t need to be personally guaranteed by the holder of the retirement account or a person currently disqualified. If the borrower defaults for one reason or another, the only recourse of the lender should be against the property and not personally against the person borrowing the money.
  • Keeping records – when making real estate purchases using your retirement investment account, it’s in your best interest to make sure you keep really good records of all of the expenses generated and income earned through this transaction. Otherwise you will leave yourself vulnerable to a potential audit or other scrutiny by the IRS. By having good records, you’ll be able to prove everything you’ve done is officially above board without breaking any rules.

Final Thoughts

Using your retirement account to buy real estate definitely has tax benefits and other positive financial advantages. The fact that you can earn tax-deferred income or income completely tax-free (depending on your account type) is proof enough that this is a wise way to invest your retirement money. Plus it’s a great way to diversify your portfolio, protect against inflation, and make positive financial gains. So if you haven’t considered buying real estate through your retirement account already, you should seriously think about switching to this rock solid investment strategy.

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