Spice Up That IRA

Alternative Investments in an IRA

The most important rule is that your IRA investment cannot involve "self-dealing." That means you can't purchase a condo and "rent" it to your child who is a college student. In fact, if any member of your family is involved in the real estate transaction, either as a seller, buyer or user of the property, it is sure to raise a red flag with the IRS.

If you're concerned about the validity of an investment for your IRA, you can contact the Labor Department for a ruling to determine whether it would be a "prohibited transaction."

Dealing with real estate partnership investments or a cash real estate purchase is relatively easy. The independent administrator handles all the paperwork and deals with the seller or developer, attorneys, and title company. Before the deal closes, the client must read and approve all documents. Then the forms are signed by the custodian/trustee to make the purchase on behalf of the IRA. As custodian, the trust company is prohibited from making any money on the real estate deal itself.

Tricks of the Trade

If there's a mortgage involved in the purchase, it creates some tricky details. Since the IRA is the owner, the loans cannot have recourse to the individual who owns the IRA. And, of course, the IRA must be funded with enough cash to make the monthly mortgage payments, and taxes and insurance, on the property titled in the IRA. That's why most property purchased in an IRA is income-producing -- although the IRA must have enough liquidity to pay monthly costs in case the property is not rented for a period of time.