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Self Directed IRA Real Estate Investments
Can Pay Big at Retirement

Did you know your self-directed IRA investments can go beyond the standard bonds and stocks?

Self directed IRAs allow you to invest in almost anything, including precious metals, private equity, franchises, real estate and commodities.

About the only things you cannot invest in are collectibles and life insurance. You may not invest in your own businesses, however, or those of people related to you.

Real estate is the most popular investment for those with self directed IRAs.

How self do directed IRA real estate investments work? What are the tax implications? Should I use a Roth or a traditional IRA? Let’s find out.

How Do Self Directed IRA Real Estate Investments Work?

Investing in real estate with your IRA money is not that much different from real estate investment in general. You can purchase real estate outright if you have a lot of money in your account, or you can make a down payment and finance the rest. You can purchase land, commercial or residential property, and even real estate debt. You cannot, however, purchase a house for yourself, even if it’s a second home. You must also be careful not to mix your non-IRA funds with any money from the IRA.

One popular way to use self directed IRA funds to purchase real estate is through options. Let’s say John Harris wants to invest in real estate with funds from his self directed IRA, but he only has $15,000 in his fund. Andrew, John’s co-worker, is trying desperately to find a small commercial building so he can open his own office. John finds the perfect building for sale for $200,000. He purchases an option to buy the building at this price for one year, which means he locks in the price and the current owner can’t sell it to anyone else for a year. The option price is $10,000.

In the meantime, John takes the building to Andrew and offers to sell it to him for $240,000. If Andrew buys the building from John, John makes $40,000 on an investment of $10,000 in the space of one year. If John’s money is in a Roth IRA, these gains are tax-free.

What Are The Tax Implications Of Self Directed IRA Real Estate Investments?

The answer to this question boils down to whether the self directed IRA is a Roth or traditional type. If it is a Roth self directed IRA, real estate tax deductions like mortgage interest and depreciation cannot be taken. Since the benefits are tax-free after retirement, you cannot take the benefits now, too. However, rent payments that you receive or any other investment income, as well as the capital gains you make from the sale of the property, are tax-free, assuming, of course, that you leave the funds in the IRA until you are at least 59 1/2 years old.

The opposite is true if you are making yourself directed IRA real estate investments from a traditional IRA.

You can deduct mortgage interest and depreciation on the property every year.

Any gains from the property, including rental income and capital gains, however, will be taxed at the normal rate.

If you expect the value of your real estate to increase tremendously over the years, you may be better off with a Roth IRA.

Speak with a professional financial adviser about your investments and their tax implications to make sure you make the right decision.

Either way, with a self directed IRA, real estate investment becomes a whole new ballgame.

Return from Self Directed IRA Real Estate to Self Directed IRA


 



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