There are only a handful of rules that govern what investments may or may not be done with an IRA. The Internal Revenue Code (IRC) does not describe what it can invest in, only what it cannot invest in. IRC Sections 408 and 4975 prohibit a “disqualified person” from engaging in certain types of transactions.  In general, other than life insurance, collectibles, and transactions involving a disqualified person, the IRA may make the investment.  The major advantage of using a retirement account to make an investment is that, in general, all income and gains from the investment will flow back to the plan without tax.  This is known as tax deferral (or tax-free investing in the case of a Roth).

This article will explore how one can establish a Self-Directed IRA to invest in real estate and take advantage of the IRS 60-day rollover rule which will allow you to use the property without tax or penalty.

Transfers and Rollovers

In general, one can transfer or rollover assets (money or property) tax-free from an IRA or a 401(k) plan to another retirement plan. You can make the following kinds of transfers:

• Transfers from one trustee to another.
• Rollovers.
• Transfers incident to a divorce.

Generally, one can transfer cash or property between IRAs and other retirement accounts anytime and without tax or penalty. So long as the transfer of assets is between retirement account custodians, there is no tax or limitations. These are known as direct transfers (or rollovers when funds are moved from one type of account to another, such as a 401(k) to an IRA). You can perform as many direct rollovers or transfers as you wish.

Indirect Transfers & Rollovers

When retirement funds are sent to the retirement account owner first, instead of the custodian, then an indirect rollover is occurring. Once you receive the funds, you have 60 days to re-contribute them to another (or the same) retirement account. This is a tax-free distribution of plan assets, which you can utilize for 60 days before putting them back into your tax-advantaged retirement plan. Just remember, you must return the distributed asset within that time-frame or else it will be treated as a taxable distribution. Plus, if you are under age 59 1/2, you will be facing a 10% early distribution penalty on the amount withdrawn.

In addition, under the 60-day rollover rule, the property returned must be the same type of property distributed. For example, if one takes a cash distribution, one will have to return the same amount of cash to ensure the rollover would be tax-free. Similarly, if one takes a piece of property as an in-kind 60-day distribution, one will have to return the same property to a retirement account.

Generally, rollovers occur when you wish to move from one custodian to another, however, that is not always the case. Indirect rollovers allow one the temporary use of funds or assets inside the plan without running afoul of the IRS prohibited transaction rules.

The 60-Day Rollover Rule

One is only allowed to engage in one 60-day rollover every 12 months. The one-year period begins on the date you receive the IRA distribution, not the date you roll it over into an IRA. It’s important to keep in mind that the rule is not “once per year.” You can’t perform one in December of 2023, then again in January of 2024. You would have to wait a full twelve months before you can perform another one.

Using an IRA-Owned Property Tax Free

Considering the rules surrounding the 60-day rollover, a potentially exciting tax strategy can be used by Self-Directed IRA investors who wish to invest in a real estate property where they would be able to use the property for up to two months every year.

The 60-day rollover rule is clear that an IRA owner can get access to their IRA-owned cash or property and do whatever they wish with it, so long as it is returned to an IRA within 60 days.  Accordingly, one can take cash out of their IRA to cover a personal expense or any other purpose.  Similarly, one that owns a home in his or her Self-Directed IRA can use the home personally for up to 60 days and then roll the asset back into the IRA before the time is up.

The IRS prohibited transaction rules under IRC 4975 do not allow an IRA owner or other disqualified person to personally benefit from the use of any IRA asset. Hence, an IRA owner could not personally stay at a home owned by the IRA.  However, if the IRA owner took an in-kind distribution of the home, it would technically not be owned by the IRA and one would have the 60-day window to use the property personally without triggering a taxable event.  This strategy can be used for any type of real asset, whether located in the United States or abroad.

Below is an example of how the 60-day IRA rollover strategy could work:

Dan and his family like to summer vacation at a lake house in Wisconsin. Dan sees a property he likes, which he would use as a rental property, but would also like the ability to use it during the summer. Under the 60-day IRA rollover strategy, he could purchase the property using a Self-Directed IRA and rent it out to a third-party most of the year.  However, for a 60-day period, Dan could take an in-kind distribution of the property and then enjoy the property with his family for up to 60 days. This strategy would work whether Dan wishes to buy a home in Wisconsin, Florida, the Bahamas, or even France. 

The 60-day IRA rollover strategy allows one the benefit of generating tax-free income while also gaining limited access to the property for personal use. This is an enticing strategy for some. Furthermore, once you reach the age of 59 1/2, you could distribute the property from the IRA, without penalty, and own the property personally. Of course, taxes would be owed on the fair market value of the house.

As an added a bonus, if this was all done with a Self-Directed Roth IRA, the in-kind distribution of the house would be a tax-free event, assuming any Roth has been opened at least five years.

Conclusion

The IRS rules are clear – you cannot personally benefit, either directly or indirectly, from an asset owned by your IRA or other retirement plan. Most IRA owners are not aware that they can perform a 60-day rollover with property, such as real estate, and not just cash. This gives them the ability to use their IRA-owned property personally without running afoul of any IRS rules.