Well said and something to think about. Taxes, inflation, market movements and miss-managed investments all can take your money away from you. Real Estate can be 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/structurning, 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 DO YOU NEED TO KNOW?
The key to sustainable wealth generation through real estate investing is to start as early as possible. It is equally important to find ways to preserve your wealth.
Self-directed IRAs are one of the best options to invest in real estate. They are often called Real Estate IRAs, due to their ability to invest in real estate and real estate-related assets.
FEATURES OF A 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 investment tools.
HOW DOES A SELF-DIRECTED IRA BENEFIT A REAL ESTATE INVESTOR?
If you are a real estate investor, a self-directed IRA can help you buy houses and offer tax-deferred growth of your assets until distribution.
As a private lender, all points and interest on your loan to a flipper or real estate investor would be subject to taxation in the year you generate those incomes. However, if the same transaction is done in the tax-deferred environment - those incomes will be sheltered from taxation until distribution.
Under a regular house flipping transaction, you purchase a home at below market rates, put in repairs and then sell it for a profit. Your profit will be subject 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.
However, 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 defer your tax bills until retirement. Please sure to consult with a CPA experienced in this area to ensure that this is not considered business activity, otherwise you could be subject to taxation. You can also 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
- Raw land and much more
In addition to the benefits offered by a self-directed IRA, you have the option to do investing inside of a Roth account. Under a Roth self-directed IRA, you pay taxes upfront and receive tax-free distributions at the time of retirement. Generally, most real estate investment transactions done within a Roth self-directed IRA account does not require taxation, allowing you to picket the returns entirely. However, there are some exceptions.
CONSIDERATIONS INVOLVED WITH REAL ESTATE INVESTING USING SD IRA
Investing in real estate IRA comes with a unique set of legal considerations and some are listed below:
- The plan/owner 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 can be called self-dealing transactions.
- Your self-directed IRA can only use non-recourse financing for a purchase, which means you cannot offer a personal guarantee. In the case of a default, the lender holds no claim other than the property itself. Any cost involved in the transaction should come out of the IRA only and any income generated from the property should go back to the plan itself.
- Unlike regular real estate ownership, you will lose depreciation deductions for properties owned by a self-directed retirement account.
If you are considering investing in a retirement account, it is vitally important that you consult with a CPA or Retirement Advisor experience in this area!
Turn-Key Properties, LLC has managed numerous properties owned in retirement accounts, but we know how to handle and manage properties owned by this means, however we are NOT qualified to give advice on how you should invest by this means. Only an experienced CPA, attorney or financial advisor can give you the best advice, based on your situation.
We wish you the best with your investments!