Gold IRA vs Real Estate (Including Real Estate IRAs)

Gold and real estate are both "hard assets," but inside an IRA they run under different rules. This page is part of our guide to Gold IRA vs Other Retirement Investments. It is general education. It does not say which is better, predict prices or claim that either one earns more. Its sources are the IRS, the tax code and a securities-regulator alert. Several points below are open to interpretation, so a qualified tax professional should review any real plan.

Can an IRA own real estate at all?

The IRS does not publish an approved list. Its retirement plan investments FAQ says: "there is no list of approved investments for retirement plans." It names two things an IRA cannot hold: life insurance and collectibles such as "art, antiques, gems, coins, or alcoholic beverages" (IRS investments FAQ). Real estate is not among the exclusions the page names.

Whether you can actually buy property is often up to the custodian. The SEC and NASAA investor alert says custodians "may allow investors to invest retirement funds in other types of assets such as real estate" (Investor Alert). An IRA that allows this is usually called a self-directed IRA. Many custodians do not offer it.

Gold is a narrower case. Coins and metal are collectibles by default. The IRS says bullion of a certain fineness is excluded if "a bank or approved non-bank trustee keeps physical possession of it" (IRS collectibles page). Our collectibles rule guide explains it.

How do the two compare at a glance?

What are the prohibited transaction rules?

The IRS says prohibited transactions are "certain transactions between a retirement plan and a disqualified person." For IRAs, it says: "Disqualified persons include the IRA owner's fiduciary and members of his or her family." Family means a spouse, ancestors, lineal descendants and a lineal descendant's spouse (IRS prohibited transactions page).

The same page lists examples for IRAs:

• Borrowing money from it
• Selling property to it
• Using it as security for a loan
• Buying property for personal use (present or future) with IRA funds

The statute behind this is 26 U.S.C. 4975. It defines a prohibited transaction as a direct or indirect "sale or exchange, or leasing, of any property between a plan and a disqualified person," "lending of money or other extension of credit between a plan and a disqualified person," and "furnishing of goods, services, or facilities between a plan and a disqualified person." It also covers a "transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan." The Cornell text we retrieved cut off before the full list of who counts as a disqualified person. We therefore quote only the IRS page for family members. For anything beyond that, see our prohibited transactions guide.

These rules apply to every IRA asset. They bite harder with property, because a house or rental can be used, leased, repaired or sold to people close to the owner. How the rules apply to a given deal, such as whether work done by the owner counts as "furnishing services," is an interpretation. The pages we opened do not settle it, and we offer no view. That is a question for a tax attorney.

What happens if an IRA breaks the rules?

The consequence is severe. The IRS says that if an IRA owner or beneficiary engages in a prohibited transaction during the year, the account "stops being an IRA as of the first day of that year." The account is treated as having distributed its assets to the owner at their fair market values on that first day. If those values exceed the IRA's basis, the owner has a taxable gain included in income (IRS).

Gold has its own version of this risk, though the trigger differs. In McNulty v. Commissioner, the Tax Court held that holding IRA-purchased coins personally, through an IRA-owned LLC, was a taxable distribution. See also checkbook IRA LLCs. The lesson in both asset types is that control and personal use are where IRA owners get into trouble.

Is there a tax issue with borrowing to buy property?

Possibly. Real estate is often bought with a loan, and that brings a separate tax. IRS Publication 598 lists IRAs, "including traditional IRAs, Roth IRAs," among the arrangements subject to the tax on unrelated business income (Publication 598). The same publication says an IRA's Form 990-T "must be filed by the 15th day of the 4th month after the end of its tax year."

Section 514 of the tax code covers "unrelated debt-financed income." It defines debt-financed property as "any property which is held to produce income" and "with respect to which there is an acquisition indebtedness" (26 U.S.C. 514). It then includes a share of the income in "an item of gross income derived from an unrelated trade or business." That share depends on the ratio of debt to the property's adjusted basis.

We could not open the part of Publication 598 that explains debt-financed income in detail, so we do not describe how it works for an IRA, work out any amount or say when it applies. A tax professional can. Also note that loans between the IRA and the owner or family are prohibited transactions, as covered above. A loan from an outside lender is a different matter, and its terms and risks are something to review with a professional.

Physical gold bought outright with IRA cash does not involve a loan, and our sources show no equivalent step for it.

What about income, liquidity and costs?

We found no regulator source comparing the two on these points, so we give no general claims. What we can say, with sources, is limited.

• Income. Property can produce rent. The sources we opened do not address how rent, expenses or repairs must be handled inside an IRA, so ask the custodian in writing. We did not find a source on whether metal produces income, so we make no claim.
• Costs. Gold involves dealer, custodian and storage costs. See dealer premiums and markups and storage fees. We did not research real estate IRA custodian fees and give no figures.
• Liquidity and prices. We make no claim about how quickly either asset sells or what it will be worth. Neither gold nor property prices are predicted here. See Gold IRA price volatility.

How careful should you be with the custodian and the deal?

The investor alert says custodians and trustees for these accounts "will generally not evaluate the quality or legitimacy of an investment." It tells investors to "undertake their own evaluation of the merits of a proposal" and to check with regulators about the investment and its promoters (Investor Alert). The alert is dated September 28, 2011, so check whether newer guidance exists.

This matters for both assets. A custodian's willingness to hold an asset is not an endorsement of it. For gold, see our guide to how to evaluate a company.

What mistakes do people make with this comparison?

• Assuming that because the IRS has no approved list, anything goes. The prohibited transaction rules still apply.
• Treating the IRA's property as personal property. The IRS lists buying property for personal use with IRA funds as prohibited.
• Overlooking family. Family members are disqualified persons.
• Ignoring tax on debt-financed property.
• Assuming the custodian has vetted the deal.
• Comparing the two assets on past returns. We do not do this, and it does not predict anything.

What related questions should you look at?

• Gold IRA vs CDs and Cash for a lower-volatility comparison.
• Gold IRA vs Bitcoin and Crypto IRAs for another alternative asset.
• A fee-only planner with no ties to a dealer, plus a tax attorney if real estate is involved, can apply these rules to your own situation. This page cannot.