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Though it isn’t well known, it’s possible to structure
your IRA to buy and sell real estate through it, thereby deferring
taxes on capital gains and rental income or, in the case of
a Roth IRA, making it all completely tax-free.
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The first step in using an IRA for tax-free or tax-deferred
real estate investment is to set your IRA up to be self-directed,
which simply allows the investor greater control over how the
funds are invested.
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A growing number of companies today offer self-directed IRA
administration services. Likewise, many independent financial
advisors are starting to offer this service as well.
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Generally, any traditional IRA, Roth IRA, Simple, or Keough
type retirement account can be converted in to a self-directed
IRA. Sometimes employer-sponsored accounts can be converted
as well. Ask your IRA administrator if this is possible.
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Once you have a self-directed IRA, the purchasing process
for real estate is essentially the same as it is otherwise,
although your IRA administrator has to purchase the real estate
on your behalf. A special fee is usually charged for this service.
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A “disqualified person” means yourself and any
other person or entities in close relation to you that are likewise
prohibited by transaction rules.
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The best way to maximize IRA real estate investments is usually
by leveraging property, but IRA rules state that any debt-financed
property that produces income is considered “unrelated
business income” (UBI). Any IRA that earns more than $1000
of UBI in a single tax year must file a special form and pay
taxes on that income.
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An easy way to avoid this problem is simply to structure the
investment so that the available property depreciation and annual
operation expenses offset the property’s income.
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An even better method, however, is to use any excess UBI each
year to make a lump sum principal reduction on the debt. Once
the debt’s paid off, the income from the investment isn’t
considered UBI any longer because the investment isn’t
debt-financed property.
Disclaimer: This article is provided for information
use only. It does not take the place of an attorney, a tax advisor,
or an accountant. Always seek out the advice of a licensed professional
before undertaking any significant change in your financial situation.
We at Valerie Fitzgerald and Associates realize that you are in the information gathering stage of your purchase and we respect your privacy. Should you have any questions, please feel free to email us at info@valeriefitzgerald.com or call us directly at 310-285-7515. If you or anyone you know is looking to buy or sell a home, please note that we can provide detailed information and access to
Beverly Hills Homes for Sale
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You can count on the services of Valerie Fitzgerald and Associates to provide you with information you can trust. |
