How can I use Self-Directed IRA funds to buy a new home?
I own a couple of houses in one of my Self-Directed IRAs. One of the houses is a rental property, which I would like to sell in order to finance the purchase of a retirement home. I recently reached the minimum required age to start taking distributions from my IRAs. How can I convert my real estate investment in one of the Self-Directed IRAs into cash for the purchase of a new home?
Self-directed IRAs can be wonderful, but there can also be some tax land mines. The more you seem to be using it for personal benefits, the more that it may be a prohibited transaction (see link on "land mines" above).
Bottom line is that you CAN NOT have a personal residence in a self-directed IRA, so the best solution is straight forward...you would have to sell one o the houses in the IRA for cash, take distribution of that cash (where you would pay taxes and penalties if under age 59 1/2).
I have a nice piece on self-directed IRAs that you may want to check out...follow this LINK for a quick .pdf to review. In the article, I also hare that you CAN borrow money inside the self-directed IRA to buy stuff inside the IRA, but using a loan to take distribution to buy a home to me would sound more like self dealing and be a prohibited transaction. Also, it would have to be allowed by the IRA Custodian AND you would have to find a bank that would loan to an IRA (due to creditor protection rules, that is not easy) and that would also cause UBIT (Unrelated Business Income Tax) that could cause you to have some taxes owed on your IRA even if you don't take money out.
I mention "Prohibited Transaction" in a Self-directed IRA a few times...if you are found to have made a prohibited transaction you could disqualify your entire IRA and cause it to be taxable and subject to penalties. So although I like self-directed IRAs, I urge you to know all the RULES of the custodian and of the IRS.
Good luck...and "be careful out there".
Sell the house in the IRA and you will have cash in the IRA. Do a cash withdrawal from the IRA (taxable event) to yourself personally and buy the retirement home. The IRS does not allow your IRA to own a home which you live in. Real Estate in the IRA must be investment property.
Great SDIRA question. We advise clients on these types of decisions very frequently. There are many variables when dealing with SDIRAs and you must be very careful with any decision, as the IRS is very particular on Self Directed investments. I would need more details to fully advise you. I'm happy to speak with you over the phone. (303) 386-2153
Joshua P. Mischke
If the house is in a Self-Directed IRA, you can sell it and keep the proceeds in the account. After that, withdraw the amount needed, knowing that this will produce a taxable event and the amount withdrawn will be added to your other income for the year. You may, therefore, want to consider some additional tax planning and spread the withdrawal over two (or more) years, if at all possible.