The IRS allows individuals to invest in real estate, but retirement investors must be careful not to engage in any Prohibited Transactions. The rules do not dictate WHAT kind of real estate one can purchase, but rather WHO the IRA can transact with. The general rule of thumb is that transacting with third parties is allowed while transacting with close family members and closely held entities – referred to as Disqualified Persons – is not. For real life examples and additional information on Prohibited Transactions, please refer to this article: Prohibited Transactions.
Title
When an IRA purchases real estate, title is held in the name of the custodian for the benefit of the IRA: “Madison Trust Company Custodian FBO [Your Name][Madison Trust Account #]”.
Financing
One can obtain financing for an IRA investment; however, the loan must be structured as a non-recourse loan. This means that the loan is backed exclusively by property, and not by an IRA holders’ s personal guarantee. The lender’s sole recourse in the case of default is the real property. One cannot personally guarantee a loan issued to their IRA, as doing so benefits their IRA and constitutes a prohibited transaction. Additionally, the loan must be issued by a non-disqualified entity.