Since 1990, investors have used 1031 Exchanges to defer taxes on capital gains from real estate. But did you know you can also use your IRA to purchase real estate for investment purposes and defer or avoid capital gains tax all together?
There's much information available on the benefits of using a 1031 Exchange but much less on the tax advantages of using your IRA. And as a vehicle for real estate transactions, an IRA has several potential advantages you should consider.
What's the advantage of using an IRA? The IRA method reduces taxes by deferring capital gains like a 1031 Exchange, and may even eliminate taxes if you use a Roth-IRA. However, unlike 1031 Exchanges, there are no strict IRS rules governing the timing of purchase or sale. Given the stress many investors feel in finding investment properties in a short time, this is a big relief.
Buying a Property with an IRA: This can be done in 4 main ways.
- Buy with 100% cash from the IRA. You choose the property and with your real estate agent, handle the traditional elements of a real estate transaction leading to closing. Then have your self directed IRA custodian (which cannot be you) sign, execute and fund the transaction. The IRA owns the property.
- Use your IRA to co-invest in the real estate with other parties. The IRA co-owns the property.
- Use your IRA to invest with other parties by forming an LLC. The LLC owns the property. If you wish to learn more about this purchase method you may be interested in attending a free Webinar, hosted by Tom Anderson of Pensco Trust Co, on April 5th at 12 pm MT.
- Have your IRA fund the down payment and you leverage the balance of the funds needed. The rules are slightly different for this transaction and you cannot use your IRA as collateral to secure a loan.
Owning an IRA held property:
The IRA owned property must be strictly for investment only. At no time can you use or benefit from it except as an investment. This includes having your business lease space in the property or having a disqualified person use it while it is held by the IRA. Eg: Renting it your children/IRA custodian.
It is important to note that all income and expenses flow directly into and out of the IRA and don’t go through you, the IRA owner. Therefore you cannot cover any deficit personally, and you may want to make sure the property cash-flows positively. Naturally, you are allowed annual contributions to the IRA within federal guidelines.
Selling or Distributing an IRA held property:
All cash from the sale must be deposited back into the IRA. From here it can be reinvested in real estate of the same or different forms, or other types of allowable investments. The investment property cannot be sold to a disqualified person.
Alternatively, at the age of 59.5 years or older, you can withdraw the real estate from the IRA, penalty free. This can be done either by selling the property or transferring the property to your name.
Be sure to understand the tax implications of withdrawal for your particular type of account.
IRA’s have varying rules regarding this and usually they are directly related to the deductions possible at the time you contributed the money to the IRA. For example, a traditional IRA will require you to pay income taxes on the current value of the property at withdrawal, but with a ROTH- IRA, you won’t owe these taxes.
For those in my age bracket, it's hard to imagine a more simple or tax advantaged strategy than buying real estate with a ROTH-IRA. By using your working years to build a healthy real estate portfolio, you can make the most of tax laws and live out your twilight years in the lifestyle of your choice!
To kick start your real estate investing future or just gather a little more information, please feel free to call me at 303.746.6896.
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The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties. We strongly recommend conducting rigorous due diligence and obtaining professional advice before buying or selling real estate.
Want to get blog updates via email? Click HERE.
Ready to buy or sell? Schedule an appointment or call 303.746.6896.
You can also like our Facebook page or follow us on Twitter.
As always, your referrals are deeply appreciated.
--
The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties. We strongly recommend conducting rigorous due diligence and obtaining professional advice before buying or selling real estate.
