People often ask me if they can use their retirement accounts, such as an IRA, to buy a vineyard. The short answer is “Yes, but…” Yes, real estate is one of the investments you are able to purchase and hold within a Self-Directed IRA. But, there are a lot of strings that are attached to doing so.
The first, and probably most significant, “string” is that the investment must be stand alone, and can’t be for personal use. The technical term is “disqualified person.” The property that you invest in can’t be used for or directly benefit any disqualified person, which is you, your spouse, kids, parents, or anyone related to them, or any business tied to any of them.
And the penalty for violating that string is harsh. The entire value of the account becomes immediately taxable once it has been determined that that rule has been violated. So if you have dreams of using your IRA money to buy that vineyard estate to live happily ever after, think again.
Ok, so what if you just want to buy the vineyard as an income property to help round out your investment portfolio. Well, now you are getting closer to the true spirit of this tool. Yes, you can do that.
But, there is one additional important string that must be considered. The investment must basically be self sufficient. That is, you can’t take any money out of your own pocket to help operate the vineyard. All of the labor to manage the vineyard, the materials and supplies, everything…must be paid for with the cash flow from the vineyard. If you make the mistake of “accidentally” paying the vineyard labor out of your own pocket, you performing a disqualified transaction, and will subject your entire investment to being an immediately taxable distribution, potentially also subject to a 10% early withdrawal penalty. Not a fun thing. But, easily done.
So I will close this post by saying this regarding the use of Self-Directed IRAs…be careful. Yes, it is an option for you to make a legitimate investment in a vineyard. But, there are a lot of tight strings that you need to make sure you don’t break.