Yes it is true, you can buy real estate with your IRA, but there are a whole lot of rules. For some situations, it is ideal and for others not so ideal. I will have to say in my opinion you get the best results when you buy property only to sell it again. When you keep it you lose some of the tax advantages.

How do I buy real estate with my IRA?
In order to purchase real estate with your IRA, your IRA must be held by an IRA custodian that allows real estate investments. Most of your traditional financial institutions do not allow you to invest in real estate but there are some out there. These types of IRAs are called "self-directed IRAs". They still can be classified as Traditional or Roth self directed IRAs.

What are the restrictions?
* All expenses incurred as a result of acquiring or maintaining the real estate, must come for your IRA funds.
You cannot use any other money besides what is in your IRA account. This includes expense such as earnest money, closing costs, improvements, etc.

* Your IRA cannot buy real estate that you already own.

* You cannot buy property for personal use or for use by a disqualified person.
Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant). The property cannot be used as your second home or as a vacation home.

* Your business cannot be located or lease real estate owned by your IRA.

What if I do not have enough money in my IRA to buy the property?
Well in that case you got three viable options...
* Get a loan
When you get a loan to purchase real estate, you are subject to some taxes called UBIT (unrelated Business Income). UBIT is incurred as a result of earnings over $1,000 a year. The UBIT taxes would be greater than the taxes paid on the profits from the rental income. Well if you held a Roth IRA, you would not have to pay any taxes on the profits from the real estate, but you do have to pay UBIT if your property has a mortgage on it.

* Pool your IRA money in with other people. In a nutshell, you can buy a portion of the real estate.
Same rules still apply.

* Invest in Real Estate Investment Trusts (REITs).
These are stocks sold on the stock market of companies that own properties. Most pay a hefty amount of dividends, as required by some kind of tax law. That is beyond the scope of this subject, but just realize that those are available. Some like this approach because the property management, maintenance, and tenant management does not fall on them.

What financial institutions offer self-directed IRAs?
See the Resources page.

Conclusions
Well, there you have it. A creative way to invest your IRA funds. On the contrary real estate appreciates over time. Depending on the area, faster or slower than the norm. If your real estate investment appreciates nicely and you are making a return on the investment from someone using it, than this option really looks good.