Vacation Properties

As the Baby Boomer population continues to grow, the price of retirement homes in sunny locations like Palm Springs and Fort Lauderdale continues to rise. Using self-directed IRAs, some investors are now purchasing these retirement dream homes well before their retirement years. Foreseeing a rise in the cost of retirement properties, most notably waterfront properties, these investors have been capitalizing on a little-known rule in the IRS code which enables the purchase of investment real estate within individual retirement accounts.

As long as the property is used as an investment, it can remain in your IRA. Jill Jensen, a real estate broker in the greater Puget Sound area reports, "There are many advantages to purchasing waterfront and retirement property before retirement with IRA funds. As a rule, these types of properties appreciate at greater rates than traditional real estate. Buying the property now locks in today's prices while allowing for a large appreciation return on your investment." Jensen describes a situation in which one of her clients used IRA funds to purchase an investment/retirement home. Her client "makes between 7-10% per month using his future retirement home as a vacation rental." This is a great return for most IRAs, not to mention the 10% rate at which Jensen tells us this property is appreciating every year.

According to Andy Saddler, a real estate agent who specializes in self-directed IRA investing, retirement homes can and are being purchased with IRA funds. Saddler explains, "In this way your IRA can receive the monthly rental cash flow and gain the appreciation. When you are ready to retire, after 59 ½, you take over the property as a distribution from your IRA and pay applicable taxes on it then, based on your tax bracket at that time. How that works is: upon moving into the home you will have triggered a distribution and would be taxed on the full amount. One way to keep the taxes as low as possible is by making incremental assignments of a percentage of a grant deed (generally done through a title company) so you can spread out the tax payments and percentages over many years. If using a Roth IRA, this distribution would be completely tax free which makes a Roth very attractive for this particular strategy."

The idea of assuring you get your dream retirement home while providing a large, secure return for your IRA is exciting news for many. Here are things to look for before buying: 

• Low housing costs— Carefully compare several options in the area including purchase price, association fees, maintenance requirements, management costs and other incidentals.
• Good hospitals for healthcare services - Healthcare becomes more of a priority as we age, so pay particular attention to the quality available in the surrounding area.
• Low taxes—Who wants to diligently plan for their retirement years and then pay hefty taxes? Make your money work for you, not the government. Choose an area outside the big cities but close enough to receive their benefits.
• Active social and cultural environments—Happy and healthy individuals live longer and enjoy their retirement more! Seek areas where other retirees choose to enjoy life.
• Great vacation area—Rent out your IRA-purchased property to vacationers.  Hire a professional property management company to coordinate and orversee the rentals.