More IRAs Housing Homes

If not at bottom, real estate is certainly beaten down, and a small but growing number of individuals are betting that buying a property now and keeping it tucked within an individual retirement account will yield gains for their future retirement.

“There are so many opportunities, prices are down in most places,” says Matt Allen of the North American Savings Bank, a Kansas City, Mo., firm that lends for IRA residential real estate purchases.

To be sure, the many Americans who are struggling to save anything for retirement are far from this sophisticated maneuver. “It is typically someone who has healthy retirement savings,” Allen says.

Real estate can be placed in either of the two varieties of an IRA – a traditional plan or a Roth IRA.

With the former, you make contributions with after-tax dollars, and then can later withdraw those dollars plus gains without tax. Contributions in a regular IRA are made with pre-tax dollars, and later withdrawals are subject to your income tax rate at the time of withdrawal.

“But really, there are so many rules [with IRAs], and there are tax advantages attached to real estate, like depreciation, that you can’t take when the property is in an IRA, that I can’t see what the advantage of this is,” wonders Steven Weydert, a Santa Barbara financial planner.

The investors “are comfortable with real estate” and expecting the tax breaks on gains afforded by an IRA to be worthwhile, shares Allen.

A company must act as custodian of the IRA, from which all rental income is deposited and expenses must be paid. There are many complex rules to follow so as not to run afoul of the IRS. Look for a firm that is overseen by state banking regulators, advises Mary Mohr, executive director of the Retirement Industry Trust Association, a trade group.