While real estate is widely acknowledged as a reliable and potentially lucrative investment, an increasing number of experienced and financially savvy investors are taking their strategy a step further by using qualified retirement accounts—such as Individual Retirement Accounts (IRAs)—to purchase property. By doing so, they are leveraging the tax-advantaged structure of these accounts to acquire real estate as either an appreciating asset that grows in value over time or as an income-generating property that produces consistent cash flow.
However, if you’re considering purchasing real estate in Birmingham through your IRA, it’s critical to have a solid understanding of the tax rules, legal restrictions, and operational complexities that come with this type of investment. From navigating prohibited transaction rules and ensuring proper custodial oversight, to understanding how rental income and expenses must be handled within the account, investing through an IRA introduces a different set of responsibilities and risks than a traditional real estate purchase. Being well-informed and consulting with experienced professionals can help ensure you remain compliant and maximize the potential benefits of your retirement real estate investment.
So, let’s explore some practical tips on buying real estate with your IRA in Birmingham Alabama!
Tips on Buying Real Estate With Your IRA in Birmingham
If you don’t already have a self-directed IRA… first and foremost… you’ll need to consult with your trusted financial advisor to find a reputable, low-fee self-directed IRA provider. Or, reach out to us and our friendly team at Merry Homes can recommend some excellent self-directed IRA companies we’ve successfully partnered with previously.
Open a Self-Directed IRA
The initial step for purchasing investment properties in Birmingham through your IRA is establishing a “self-directed” IRA. You can accomplish this by consulting a qualified financial advisor or other trusted fiduciary to serve as your IRA custodian. A fee-only financial advisor can help you set up this account with minimal complications, while a commission-based advisor might discourage you from investing in tangible assets within your IRA (since they won’t earn significant commissions on such investments).
Types of Properties You Can Buy With Your IRA and Rules
Your IRA can hold various property types, including residential, commercial, and industrial buildings, as well as vacant land. Many experienced investors prefer purchasing parking lots, storage facilities, and similar properties that require minimal maintenance while generating consistent income—much like our approach at Merry Homes when we evaluate investment opportunities.
Your IRA cannot own any property where you live or vacation. Legally, you aren’t even permitted to spend a single night in the property. You cannot circumvent this restriction by “renting” from your IRA, or renting to your spouse, children, grandchildren, parents, or grandparents, nor can you use an IRA to purchase property from close family members. You could, however, rent to a sibling, cousin, or friend. A common strategy many investors implement is acquiring a property within their IRA, generating rental income until retirement, then taking up residence after retiring.
How Does Income Work With Real Estate In An IRA?
The income generated in your IRA cannot be used for your “personal current benefit.” This means all revenue produced by the property must remain within the IRA until retirement. When selling the property, all profits must stay within your IRA. Additionally, property taxes, insurance, improvements, and other property-related expenses must be paid from the IRA itself. Failing to comply with these regulations could disqualify your IRA, subjecting you to income taxes on the entire property value, plus a 10% early distribution penalty.
It’s crucial to understand that all distribution rules associated with an IRA (or Roth IRA)—including taxation, required minimum distributions, beneficiaries, and other factors—remain unchanged when using a self-directed IRA to purchase property. Real estate in your IRA can offer significant advantages, but it’s important to fully understand what you’re getting into, just as we at Merry Homes emphasize transparent, supportive guidance with all our clients.