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How to Boost Your Real Estate Returns with a Self-Directed IRA

Robert Kiyosaki coined a timeless piece of wisdom in the form of this quote:

“Most people fail to realize that in life, it’s not how much money you make, it’s how much money you keep.” ~ Robert Kiyosaki

It is quite often the case when people make a lot of money but find it difficult to keep it with them.  Taxes, inflation, market movements, and mismanaged investments are among some of the common culprits.

While discussing wealth preservation, it is hard to overrule real estate as one of the finest methods to pass on wealth through the generations.  Being a real estate investor, you not only get to own a physical asset and receive rental income, but with careful planning/structuring, you can create a stable source of income for your retirement.  It’s a very common practice among realtors and investors to keep some properties to fund their retirement.

Self-Directed IRA: What you need to know about it?

The key to sustainable wealth generation through real estate investing is to start as early as possible. With that being said, it is equally important to find out ways to preserve your wealth.

Self-directed retirement accounts are one of the best options to invest in real estate with tax benefits. They are often called Real Estate IRAs, primarily because of their ability to invest in real estate and real estate-related assets. Working with real estate investors as our primary clientele, we learn some interesting tax-saving strategies and creative financing stories; but before we get into those discussions, let us first briefly explain the features of a self-directed IRA.

Self-Directed IRA (SD IRA)

A self-directed IRA is a qualified retirement plan that offers complete control over the investment choices available to the retirement account holder. These investment options include real estate, private placements, tax deeds, tax liens, mortgage notes, and similar alternative investments tools.

How does it benefit a real estate investor?

If you’re a real estate investor, a self-directed IRA can help you buy houses and offer tax-deferred growth of your assets until distribution.

Under a regular house flipping transaction, you purchase a house at below market rates, put in repairs, and then sell it for a profit. Without discussing the overwhelming amount of work involved in that single sentence, your profit will be subjected to taxation. The IRS terms it as capital gains and for assets held for less than a year, these rates could be as high as 35%, although the maximum taxation subsides to 15% or less for assets held for a year or longer.

On the contrary, if you purchase real estate through a self-directed IRA, the entire process remains the same except for the fact that you don’t have to pay taxes until distribution. In short, you can engage in multiple house purchasing transactions and defer your tax bills until retirement. In fact, you can fund more purchases from the profit generated by your previous transactions.

Real estate investing options using a self-directed IRA:

  • Residential properties
  • Commercial properties
  • Multi-family units
  • Farm/agricultural land
  • Apartment buildings
  • Condominiums
  • Raw land and much more

Add the Roth advantage for tax-free gains

In addition to the benefits offered by a self-directed IRA, it comes with a Roth account option. Under a Roth self-directed IRA, you pay taxes upfront and receive tax-free distributions at the time of retirement. Further, any real estate transaction done within a Roth self-directed IRA account does not attract taxation, allowing you to pocket the returns entirely, although a few exceptions may apply.

Additional legal considerations involved in real estate investing using SD IRA

Investing in real estate IRA comes with a unique set of legal considerations, and some of these are listed below.

  • The plan owner/trustee cannot use the property for personal benefit.
  • You cannot do business with the IRA, which includes using your construction or marketing services for the sale or repair of the property. The same rule holds true for your ascendants, descendants, and even spouses. These are often called as self-dealing transactions.
  • Your self-directed IRA can only use non-recourse financing for a purchase, which means you cannot offer a personal guarantee, and in case of a default, the lender holds no claim other than the property itself. While UBIT tax will apply for the use of non recourse financing in an IRA, this can be a valuable option in certain situations. Any cost involved in the transaction should come out of the IRA account only, and similarly, any income generated from the property should go back to the plan itself.
  • Unlike regular real estate ownership, you will lose depreciation deductions for the properties owned under a self-directed retirement accounts.

A self-directed retirement account allows investors to use their retirement funds for real estate investing and add alternative assets to their retirement plan.


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