Using IRA funds in a 1031 purchase....

Can I use my IRA along with my 1031 proceeds to buy my replacement property...?

Yes you can, but it has to be done just right, and there are some limitations on how you use your property. Any property purchased by your IRA must be used for investment purposes only--so your replacement property cannot be a vacation home for you to use personally and it cannot become your personal residence in the future. In fact you cannot rent your property out to any disqualified person, which is your business or any immediate family member except siblings.

In order to get the full benefit of your 1031 exchange, you must buy and take title to a property equal or greater in value than the one you sold. In addition, if you use your IRA in your purchase it will need to take title to the property for the percentage it is buying. Specifically, that portion bought with IRA money must be titled in the IRA's trust name.

So how do you make both these requirements work? First, the exchange portion must at least equal what you sold for. For example, if you sold for $300K and buy for $400K, you must take title to at least $300K of your new property as the replacement part of your exchange; the IRA can take title to the remaining $100K. Keep in mind that your proceeds from your old property may not be enough to cover your $300K purchase so you will need to make up the difference with a loan or with your own cash, but either way, your IRA can only buy the excess part of the property. In other words, the most IRA proceeds you could use in our example would be the $100K.

And an important thing to remember when thinking about using your self directed IRA to help purchase your replacement 1031 property is to talk to your IRA custodian; it could be that your plan does not even allow for real estate purchases.

--The Experts

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