First things first: you cannot live in a property that is presently owned by your IRA. That is one of the chief items in the list of actions prohibited by the IRS regarding investing in a Self-Directed IRA.
That being said, I promise I did not mislead you with the title of this post. The truth is that planning to live in a property owned by your IRA is not only absolutely allowed, but also something that is not uncommon. As long as you abide by the rules and regulations laid out by the IRS, your IRA-owned property could become your cash cow and your dream home.
People are often curious if they can live in a property owned by their IRA. Less often (but not unheard of) are people who become discouraged about the concept of self-directed investing when they learn of their inability to live in the house they are investing in. They are excited about the opportunities a Self-Directed IRA provides, but lose their enthusiasm when sifting through some of the restrictions they see involved with the process. Their enthusiasm can be easily salvaged, however, once they receive a full picture of how to live in their IRA-owned property.
This was proven true recently during a correspondence between an interested investor and one of our Self-Directed IRA experts, Jeff Astor. After reaching out with a handful of questions about the investor’s situation, Jeff received a response from the investor who stated that not “really ever owning the house” and not being able to directly participate in improvements to it turned him off to Self-Directed IRAs. As a 56-year-old man, he was seeking residential real estate to purchase and use to live in the not-too-distant future.
Upon reading the investor’s concerns, Jeff (having dealt with similar concerns before) filled the investor in on the truth about living in a property owned by your IRA. The truth that increasingly seems more and more like a great, hidden secret with every person we discover that doesn’t know this: it is very simple to live in your IRA-owned property. All you have to do is take its value as a distribution.
After you’ve collected rent on the property for a few years, watched it go up in value, and decided you would like to call it home, having it for yourself is as easy as taking cash distributions from your IRA, just as you would when you hit 72 years old.
Comps can determine the value of the property in most cases, but an appraisal might be necessary if you are taking required minimum distributions (RMDs) and then sell the property. If taking the full distribution in one year would result in too large of a tax hit, you are permitted to “spread out” the value over several years, and then live in the property after the full value is distributed.
Once you accomplish these straightforward requirements, the house you have been benefiting from financially for years is now yours to enjoy as a home.