This includes both rental income and capital gains. Any investment made by your IRA should be considered an equal transaction, as if you were negotiating with a stranger. That means you can't use your IRA money to buy or sell real estate for yourself or your family members, and you can't receive any personal benefits from the property. It can't be a property that you use for yourself in any way, shape or form.
While your custodian will manage the technical side of your investments in a real estate IRA, he will not serve as a financial advisor or guide you in your investment decisions. However, if you really want to diversify your retirement portfolio for the future, you can also consider investing your IRA savings in real estate. Let's talk about what that process entails, why a real estate IRA is worth considering, and some important pitfalls to consider. There are a number of rules that must be followed in order to legally purchase real estate with funds in an IRA account.
Keep in mind that this is different from holding property in an IRA, and future home equity gains won't be protected from taxes like they would be in an IRA. If you improperly purchase real estate with an IRA, you can disqualify the IRA, making all of your funds taxable. Real estate can provide a steady stream of income from rents, and any rental income you collect grows tax-free within the IRA. Because your IRA doesn't pay taxes, you can't take advantage of the deductions that come with owning real estate.
When people first learn that they can legally purchase real estate with IRA money, they get excited and think they can use IRA funds to buy vacation property or a home that they can rent to their children. Unless you have the time and experience to manage real estate, you're probably better off using more conventional strategies for your IRA. Buying real estate with an IRA is an option to consider, as it will allow you not only to diversify your retirement portfolio, but also to encourage even greater growth in your savings. A self-directed IRA is independent of any brokerage agency, bank, or investment company that makes the decisions for you (most brokerage accounts don't allow holding real estate, anyway).
Everything goes through the custodian to prevent you from violating the strict rules relating to these real estate transactions. If you're not sure if buying real estate with an IRA is right for you, or how to do it correctly, consult a financial advisor. Finally, as a solid asset, real estate helps diversify a portfolio that would otherwise be invested in stocks and other securities would not be the worst idea in the world.