Rental Property in an IRA

Case Study: Invest in Rental Property with Your Old 401(k) Funds

This case study details the process and benefits of rental property in an IRA using your old 401(k) or other former employer’s qualified plan funds to invest.

Andre wants to invest in a $200,000 rental property in his neighborhood. Since he knows the area well, he is confident this investment will produce desirable returns. He doesn’t have enough cash to purchase the property, but he has funds in an old Man stands in front of his investment rental property401(k) from his previous employer that are just sitting in the account. Andre doesn’t want to cash out the account and pay tax on the income the account made. But he does want to use the funds to continue to build retirement wealth. So, he opens a self-directed IRA, which will allow him to invest in rental property.

Andre opens his self-directed account with Advanta IRA and moves funds into the new IRA from his old 401(k). When performed properly, this custodian-to-custodian transaction incurs no tax. The investment property is purchased (and owned) by his new self-directed IRA. And since the IRA owns the asset, all income from rental payments is deposited—tax-free—into the account. There, it continues to grow on a tax-free (Roth IRA) or tax-deferred (traditional IRA) basis.

The Investment Process with Advanta IRA Is Seamless

Andre’s role and responsibilities:

  • Makes an offer to purchase the property for $200,000.
  • Submits a Purchase Authorization form to Advanta IRA.
  • Reads and approves all purchase documents.

Advanta IRA’s role and responsibilities:

  • Works with closing agent to ensure proper titling on all documents
  • Signs documents on behalf of the IRA
  • Wires the closing funds to complete the purchase
  • Holds the deed and copies of all documents
  • Receives all income (rental payments) the investment makes
  • Pays expenses of the investment (at Andre’s direction) from IRA funds

How Andre Earns Retirement Income on Rental Property in an IRA:

  • The IRA’s property is rented at $2,000/month for 2 years ($48,000 gross rent)
  • The IRA pays an average of $500/month in expenses ($12,000 gross expenses)
  • Andre sells the property in two years for $225,000 and makes $25,000 in profit on the sale
  • No taxes are paid on the $36,000 of net rental income or on the $25,000 in profits from the sale
  • Andre now has $261,00 in his self-directed IRA to invest in another property

Andre’s IRA made a great return in two years, which he can reinvest into another property or a multitude of other alternative assets.