The Hidden Risk of Using an IRA to Buy Real Estate: A $5.3M Case Study

When a longtime property management client approached GM Properties about purchasing a multi-tenant industrial property, using a self-directed IRA, the firm’s seasoned team stepped in to guide the investment from acquisition to exit. The client, a knowledgeable investor seeking to diversify away from stock market volatility, used a $1 million balance in his IRA to acquire a commercial property entirely in cash, complying with IRS rules through a third-party custodian.

Over the next two decades, GM Properties provided full-service management, navigating complex IRA compliance requirements and evolving market conditions. But as the property appreciated far beyond its purchase price, it created unexpected challenges when Required Minimum Distributions (RMDs) came due. Ultimately, GM Properties helped the client adapt their long-term strategy to preserve wealth and exit the asset efficiently.

This scenario offers valuable takeaways for owners who are considering using a self-directed IRA to purchase real estate. From acquisition and management to exit, the case study outlines how factors like IRS-required distributions, custodial restrictions, and appreciation over time can impact investment plans, and how expert support can help maximize outcomes.

GM PROPERTIES’ STRATEGIC APPROACH

While many investors understand the appeal of holding real estate within a self-directed IRA, few anticipate how IRS rules and long-term property appreciation can complicate retirement planning. In this case, the client initially purchased the multi-tenant industrial asset in 2001, and for many years the investment performed smoothly. However, as the property appreciated significantly over two decades — reaching a value of $5.3 million in 2023 — the IRS’s Required Minimum Distribution (RMD) calculations began to create significant challenges. RMDs are based on both the owner’s age and the IRA’s total asset value, meaning the required distribution amount grew larger each year regardless of the property’s income.

When the original owner passed away, the IRA transferred to his spouse, who was 90 years old. Due to her life expectancy factor under IRS guidelines and the property’s appreciated value, her 2024 RMD totaled $398,000. Yet the building generated only $250,000 in net income, leaving a substantial shortfall that could not be met through the asset itself.

GM Properties worked closely with the client and her advisors to evaluate the situation and model the projected RMD increases. It became clear that continuing to hold the property would create increasing financial strain, as future RMDs would likely exceed both income and available IRA cash reserves. With those considerations in mind, GM Properties recommended a strategic sale to protect the client’s long-term financial wellbeing.

To prepare for an efficient and favorable exit, GM Properties coordinated with the IRA custodian, advised on timing, prepared the asset for market, and leveraged strong industry relationships to identify qualified buyers. This comprehensive approach ultimately positioned the client for a high-value sale that aligned with her planning needs.

RESULTS & CLIENT BENEFIT

GM Properties negotiated the $5.3M deal, navigating complex IRA compliance and market timing to help the client realize strong gains, all while minimizing disruptions to tenants and maintaining asset integrity. The outcome allowed the client to exit the investment cleanly, comply with IRS requirements, and realize significant long-term gains.

BOTTOM LINE FOR OWNERS

If you’re considering holding real estate in a retirement account, here are a few key considerations:

• Understand the restrictions. IRA-owned properties must follow strict IRS rules, including how income is received, how expenses are paid, and who can perform property-related tasks.
• Plan ahead for liquidity. Because Required Minimum Distributions (RMDs) are based on your age and the total value of IRA-held assets, you may be required to withdraw more than your property generates in income, especially if the asset appreciates significantly.
• Appreciation isn’t always your friend. While rising property values are appealing on paper, they can increase RMD obligations to unsustainable levels if the asset doesn’t produce matching income.
• RMDs are mandatory. These required withdrawals apply regardless of whether your account holds liquid funds or illiquid assets like real estate. The IRS expects timely, full distributions.
• Work with experienced advisors. From tax professionals to property managers, ensure your team understands the specific rules and risks associated with self-directed IRA investments.
• Think long-term. Legacy planning is essential. If your IRA is passed on to a spouse or heir, make sure they’re equipped to handle both the asset and its associated obligations.

_______________________