Can You Invest In Real Estate With An IRA or 401(k)?

The following is a post by MPFJ staff writer, Kevin Mercadante, who is a professional personal finance blogger, and the owner of his own personal finance blog, He has backgrounds in both accounting and the mortgage industry.

The short answer to this question is yes. But, the real question that needs to be answered is why would you even want to? That’s the issue were going to take a look at here.


You can – but you probably can’t invest in real estate through your 401(k) plan

Confused? Though the IRS does not specifically prohibit investing in real estate through a 401(k) plan, employers and plan trustees are almost unanimous in avoiding it. This is particularly true when it comes to investing in a specific piece of property for the benefit of a single plan participant. There are technicalities and prohibitions (discussed in more detail below) that make direct investing in real estate a nightmare for retirement plan trustees. You can inquire of your plan trustee whether or not this will be permitted, but it’s 99.9% certain that the answer will be no.

There are articles and experts who will advance the cause of buying real estate with a 401(k) plan, but there’s some sleight-of-hand involved in the discussion. What is typically advocated is borrowing against your 401(k) plan to provide at least some of the funds for the purchase of a specific piece of property.

Under IRS regulations, 401(k) plans are permitted to loan out up to 50% of the participants plan value – to a maximum of $50,000 – to the participant. This money can be used as a down payment for the purchase of property.

However, even if you are going to engage in this practice, you will be leveraging your retirement plan in order to buy a real estate investment which itself will be further leveraged.

Let’s say that you borrow $50,000 from your 401(k) to make a 20% down payment on a $250,000 property. The remaining $200,000 will come from a mortgage directly secured by the property itself. That means that your investment in the property – which itself is a risk investment – will be 100% leveraged. That’s an even bigger risk.

If the investment blows up for any reason, you’ll not only lose money on the property, but you also lose some or all of the money borrowed from your retirement plan.

I believe that’s called double jeopardy.


You can with an IRA – and also SEP or SIMPLE IRAs, or Solo 401(k) plans

What do all these plans have in common? They’re all self-directed plans. For that reason it’s theoretically possible to invest directly in a specific piece of real estate through the given retirement plan. Since you have direct control over the plan, you can structure it in a way that will permit you to do this.

But there are some restrictions, and that’s where this gets messy.

When you purchase real estate in your retirement plan, all funds used to purchase the property must come out of that specific retirement plan. Any income earned by the property – including proceeds from the ultimate sale of the property – must be returned to the retirement plan.

There’s an even bigger restriction: if you purchase real estate in your retirement plan, you cannot personally manage the property in any way. This is the limitation that makes ownership of real estate through a retirement plan technically impossible for small real estate investors.

If you are buying a property for the purpose of managing and profitably selling for a big gain, you’ll automatically disqualify both the investment – and your retirement plan. All investment within a retirement plan must be handled on an arm’s-length basis. That means that in order to comply, you’ll have to hire a management company to run the real estate investment for you.

You won’t be able to manage property any way. You will not be able to work on physical maintenance or remodeling of the property, market rentals, screen tenants, collect rents, or pay bills. With those restrictions, you’re better off making a paper investment in real estate through third-party sources.

Direct management of the property is considered a prohibited transaction under IRS retirement plan rules. And there are other such prohibited transactions (For a more detailed discussion of prohibited transactions, please check Retirement Plans FAQS Regarding IRA Investments).

If you engage in a prohibited transaction with your retirement plan – something that is very easy to do when investing in real estate – the IRS can literally invalidate your plan. If they do, your entire plan will be considered distributed, and you’ll be subject to ordinary income tax, plus a 10% early withdrawal penalty.


Should you invest in real estate with your retirement plan?

In a word, nope! Even though the IRS says you can invest in real estate with certain retirement plans, that doesn’t mean you should. There are too many reasons why you shouldn’t.

Losses are not tax deductible. This is a risk of all capital investments, but much more so with real estate. For starters, real estate often operates at a loss especially in the early years. You won’t be permitted to deduct those losses. And if the entire investment goes sour, you won’t have the benefit of capital loss deductions. There’s no upside to investing in real estate through a retirement plan if the investment goes bust.

Real estate is not a liquid investment. One of the difficulties with real estate in general is a fact that it‘s not particularly liquid. Not only can it be difficult to sell an individual property, but you may need to hold onto it for many years before it becomes truly profitable. That will crowd out other potential investment opportunities.

Excessive capital allocation. Since you will have to make the entire real estate investment through your retirement plan, an inordinate amount of the plan will be invested in single asset. Diversification of the portfolio will be close to impossible.

Potential for trouble with the IRS. This gets back to those prohibited transactions we talked about above. The risk of this is substantial.

It will be difficult to find a trustee who will allow it. Just because the IRS permits real estate investment for certain retirement plans doesn’t obligate trustees to offer it. For all the reasons listed above – plus an almost impossible administrative burden – most retirement plan trustees will not permit you to hold real estate in the plans.

Investing in real estate through your retirement plan – an interesting concept, most definitely – but not one you should participate in. As an alternative, you can hold real estate investment trusts (REITs) in your retirement plan, as well as stocks and funds that are primarily engaged in real estate related activities. Or you can purchase investment real estate with non-retirement funds, and enjoy a whole lot more flexibility – as well as generous tax benefits.

How about you all? Have you ever thought about investing in real estate with one of your retirement accounts? Do you know anyone that has done this type of thing? 

Share your experiences by commenting below! 

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