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When most investors think of their Individual Retirement Account, or IRA, they think of the traditional stocks and bonds that have typically constituted such accounts. However there is a growing trend for adding real estate holdings to your account.

Now before you go racing off to purchase a property for your IRA remember this is a government program we are talking about so it will not be easy. There are a myriad of rules and regulation to be followed if you are going to add real estate to your IRA. Marketwatch has done a great job of summerizing the high points, but even after reading this make sure you talk with a professional investment advisor so you do not end up in trouble with the IRS.

Anderson and other experts caution that while investing in real estate is permitted in an IRA, such transactions involve complex Internal Revenue Service rules and violating them could lead to substantial taxes and penalties.
Chief among them: an IRA cannot do business with a disqualified person, such as the individual IRA owner, a spouse, parent, children, or grandchildren. The entire venture, including management of the property, must run as an arms-length transaction. Because an IRA cannot purchase real estate and then have a disqualified person use it while it is in the account, residences and vacation homes the owner or his family occupies are off the table. Even if a vacation home is rented out most of the time, the investment could be considered a prohibited transaction if the owner uses it even occasionally while it’s in the IRA.
Watch out for other rules and pitfalls. You can’t invest in property you already own. Rental income must flow back into the IRA, and the IRA must pay for all expenses associated with the property. The IRA will pay tax on unrelated debt financed income (UDFI), which is the income and/or capital gains attributable to the leveraged portion. For that reason, Anderson says, carrying debt in a real estate investment transaction is a bad idea if there’s any significant risk that the IRA will be unable to pay the mortgage payments.  via MarketWatch.

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