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Is there ever a time when it is NOT wise to invest your IRA money into a great real estate deal? You may be surprised to hear it, but the answer is, without a doubt, YES! I’ll tell you when that’s true… and give you an extraordinary alternative. I’m Bryan Ellis. This is Episode #233
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Hello, Self Directed Investor Nation! Welcome to another exciting edition of Self Directed Investor Radio, the show by savvy investors, for savvy investors where we help you to DECLARE INDEPENDENCE from Wall Street… and help you to build wealth for generations to come.
This is is Episode #233 and you know what that means… you can find the transcript and show notes for today’s episode at SDIRadio.com/233. And if you have questions or comments, you can post them right there at SDIRadio.com/233 or you can reach out on either Twitter or Facebook at SDITalk.
My friends, a few months ago, a highly esteemed publication – none other than TheStreet.com, a major news source for the whole Wall Street crowd – asked me to begin writing for them, as there’s a very clear appetite on the part of many, many “conventional” investors to look at ways to invest their capital OUTSIDE of the monster known as Wall Street.
The very first article I wrote for them – called “Avoid These 5 Traps When Buying Real Estate In Self-Directed IRA’s” – was promptly awarded an editor’s choice award, which is of course, gratifying, so thank you to the editorial team at TheStreet.com. But that article and the 5 points within it point to a reality that is somewhat foreign to many investors like me and you who, completely reasonably, see the self-directed IRA and/or 401k as the best thing since sliced bread. That reality is that: Sometimes, it’s a good idea to AVOID buying real estate in your self-directed IRA.
Here’s why:
First, it’s actually possible you’ll pay MORE in taxes by doing so. If you’re using a Roth IRA… no problem, your tax issue is solved. But if you’re using a traditional account, remember that when you make withdrawals, those withdrawals are taxed at INCOME TAX rates, which are frequently MUCH HIGHER than the capital gains rates you’d likely pay if you did the same deal OUTSIDE of your IRA. This is a complex issue, and merits some professional advice.
The Second complication with buying real estate in your self-directed IRA is related to LEVERAGE… also known as getting a loan to buy property. You absolutely CAN do that within a self-directed IRA. But it’s complicated, and it does subject your IRA to present-day taxes based on a variety of factors we won’t dive into here. Getting a loan to buy real estate OUTSIDE of an IRA is, by comparison, a rather simple, cut-and-dry sort of thing, so remember that if leverage is key to your strategy.
The Third issue is that if you buy real estate in an IRA, you no longer get the benefit of other great real estate-specific tax advantages that render the IRA less meaningful, such as depreciation and the almighty 1031 exchange. Those two benefits alone make it worth seriously considering doing a real estate deal OUTSIDE of an IRA rather than inside of it if you have that option.
The fourth big issue for buying real estate in a self-directed IRA is connected with the notion of SWEAT EQUITY… the active investor’s best friend. You know what I’m talking about… sweat equity is the increase in property value one receives by doing work on the property yourself rather than hiring out to expensive contractors. But with a self-directed IRA, that issue is challenging because it’s very plausible and very reasonable for the IRS to view the work you’re doing on your IRA’s houses without being paid as a contribution to the plan beyond what’s allowed, and that can cause a big heap of trouble for you should Uncle Sam decide to have a closer look at your IRA.
And the fifth big issue for buying real estate inside of a self directed IRA is this: You’ve got the freedom to hang yourself. What I mean is that you are, almost completely, unrestricted in your moment-to-moment activities with the assets of your self-directed IRA. That’s a good thing… freedom is wonderful, but it can be dangerous, too. Because if you run askew of the IRS’ rules for how your self-directed IRA can be managed – and those rules are both LEGION and sometimes indecipherable – then the IRS could pin your account with the dreaded “prohibited transaction” label which… in one way of looking at it… probably means that somewhere between half and all of the value of your IRA just went out the door to taxes, penalties and interest because the IRS is NOT PLAYING AROUND on this prohibited transactions thing.
That all sounds rather ominous, doesn’t’ it? Well… it is. But only if you’re not well prepared for what you’re attempting to do.
You see, it IS both legal and frequently wise to buy real estate in an IRA. But there is a generalization that I’d like to recommend to you, which is:
For any given real estate transaction, if you have the option whether to perform he deal EITHER inside OR outside the IRA, my recommendation is that you default to skipping the IRA and do the deal with non-retirement funds. You’ve heard 5 reasons why so far, but here’s the really big one:
Real estate is, as a legal, statutory matter, extremely tax-favored by the law… much more so than practically any other asset class… certainly more so than stocks. What I mean is that, even without the benefit of a self-directed IRA, the tax laws are so kind to real estate investors who plan properly that you may actually end up doing BETTER for yourself financially by focusing on the two tax goldmines that exist for real estate investors, which are DEPRECIATION and the 1031 exchange.
Depreciation is a tax strategy that allows many investors to take more in tax deductions than they’ve actually spent. So it’s a great income tax shelter if you qualify for it.
The 1031 exchange is another marvel of real estate tax law that, in a nutshell, allows you to buy a property, let it blow up in value and become very profitable, and then sell very profitably and pay no tax… as long as you immediately re-invest your proceeds of sale into some other real estate deal. It’s a way to get the same type of tax deferral that traditional IRA’s offer… but without the threat of prohibited transactions or other risks that are inherent to self-directed IRAs.
But I have one other parting bit of advice for you as well: Don’t avoid a great real estate deal just because your IRA is the only place where you can fund the deal. Absolutely not. I’m NOT telling you that you should NEVER buy real estate in your IRA… only that you should be biased against doing so if you have other alternatives.
And, of course, you need to speak with your own tax counsel about this. The truth is I know MANY, MANY people who have very successfully navigated the requirements of owning real estate in their retirement accounts… and are very glad they did so.
And, by the way… if you are looking for a GREAT real estate investment… I’ve got some thoughts for you on that, too! Just text the word SENDBOOK to 44222 to get a free copy of our latest ebook called the SDI Guide To Real Estate Wealth for Busy Investors where you’ll learn how to build a high-quality portfolio of turnkey rental properties that build your cash flow – and your wealth – without your day-to-day involvement… just like it should be for busy investors like you! Again, just go ahead and text SENDBOOK with no spaces, just one word, to 44222 right now.
Folks, I hope you had a very merry Christmas or are enjoying a happy Hanukkah. The coming year is going to be an exciting, exciting time for all of us, and for now, I leave you with this bit of advice… invest wisely today, and live well forever!
Hosted on Acast. See acast.com/privacy for more information.
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Is there ever a time when it is NOT wise to invest your IRA money into a great real estate deal? You may be surprised to hear it, but the answer is, without a doubt, YES! I’ll tell you when that’s true… and give you an extraordinary alternative. I’m Bryan Ellis. This is Episode #233
----
Hello, Self Directed Investor Nation! Welcome to another exciting edition of Self Directed Investor Radio, the show by savvy investors, for savvy investors where we help you to DECLARE INDEPENDENCE from Wall Street… and help you to build wealth for generations to come.
This is is Episode #233 and you know what that means… you can find the transcript and show notes for today’s episode at SDIRadio.com/233. And if you have questions or comments, you can post them right there at SDIRadio.com/233 or you can reach out on either Twitter or Facebook at SDITalk.
My friends, a few months ago, a highly esteemed publication – none other than TheStreet.com, a major news source for the whole Wall Street crowd – asked me to begin writing for them, as there’s a very clear appetite on the part of many, many “conventional” investors to look at ways to invest their capital OUTSIDE of the monster known as Wall Street.
The very first article I wrote for them – called “Avoid These 5 Traps When Buying Real Estate In Self-Directed IRA’s” – was promptly awarded an editor’s choice award, which is of course, gratifying, so thank you to the editorial team at TheStreet.com. But that article and the 5 points within it point to a reality that is somewhat foreign to many investors like me and you who, completely reasonably, see the self-directed IRA and/or 401k as the best thing since sliced bread. That reality is that: Sometimes, it’s a good idea to AVOID buying real estate in your self-directed IRA.
Here’s why:
First, it’s actually possible you’ll pay MORE in taxes by doing so. If you’re using a Roth IRA… no problem, your tax issue is solved. But if you’re using a traditional account, remember that when you make withdrawals, those withdrawals are taxed at INCOME TAX rates, which are frequently MUCH HIGHER than the capital gains rates you’d likely pay if you did the same deal OUTSIDE of your IRA. This is a complex issue, and merits some professional advice.
The Second complication with buying real estate in your self-directed IRA is related to LEVERAGE… also known as getting a loan to buy property. You absolutely CAN do that within a self-directed IRA. But it’s complicated, and it does subject your IRA to present-day taxes based on a variety of factors we won’t dive into here. Getting a loan to buy real estate OUTSIDE of an IRA is, by comparison, a rather simple, cut-and-dry sort of thing, so remember that if leverage is key to your strategy.
The Third issue is that if you buy real estate in an IRA, you no longer get the benefit of other great real estate-specific tax advantages that render the IRA less meaningful, such as depreciation and the almighty 1031 exchange. Those two benefits alone make it worth seriously considering doing a real estate deal OUTSIDE of an IRA rather than inside of it if you have that option.
The fourth big issue for buying real estate in a self-directed IRA is connected with the notion of SWEAT EQUITY… the active investor’s best friend. You know what I’m talking about… sweat equity is the increase in property value one receives by doing work on the property yourself rather than hiring out to expensive contractors. But with a self-directed IRA, that issue is challenging because it’s very plausible and very reasonable for the IRS to view the work you’re doing on your IRA’s houses without being paid as a contribution to the plan beyond what’s allowed, and that can cause a big heap of trouble for you should Uncle Sam decide to have a closer look at your IRA.
And the fifth big issue for buying real estate inside of a self directed IRA is this: You’ve got the freedom to hang yourself. What I mean is that you are, almost completely, unrestricted in your moment-to-moment activities with the assets of your self-directed IRA. That’s a good thing… freedom is wonderful, but it can be dangerous, too. Because if you run askew of the IRS’ rules for how your self-directed IRA can be managed – and those rules are both LEGION and sometimes indecipherable – then the IRS could pin your account with the dreaded “prohibited transaction” label which… in one way of looking at it… probably means that somewhere between half and all of the value of your IRA just went out the door to taxes, penalties and interest because the IRS is NOT PLAYING AROUND on this prohibited transactions thing.
That all sounds rather ominous, doesn’t’ it? Well… it is. But only if you’re not well prepared for what you’re attempting to do.
You see, it IS both legal and frequently wise to buy real estate in an IRA. But there is a generalization that I’d like to recommend to you, which is:
For any given real estate transaction, if you have the option whether to perform he deal EITHER inside OR outside the IRA, my recommendation is that you default to skipping the IRA and do the deal with non-retirement funds. You’ve heard 5 reasons why so far, but here’s the really big one:
Real estate is, as a legal, statutory matter, extremely tax-favored by the law… much more so than practically any other asset class… certainly more so than stocks. What I mean is that, even without the benefit of a self-directed IRA, the tax laws are so kind to real estate investors who plan properly that you may actually end up doing BETTER for yourself financially by focusing on the two tax goldmines that exist for real estate investors, which are DEPRECIATION and the 1031 exchange.
Depreciation is a tax strategy that allows many investors to take more in tax deductions than they’ve actually spent. So it’s a great income tax shelter if you qualify for it.
The 1031 exchange is another marvel of real estate tax law that, in a nutshell, allows you to buy a property, let it blow up in value and become very profitable, and then sell very profitably and pay no tax… as long as you immediately re-invest your proceeds of sale into some other real estate deal. It’s a way to get the same type of tax deferral that traditional IRA’s offer… but without the threat of prohibited transactions or other risks that are inherent to self-directed IRAs.
But I have one other parting bit of advice for you as well: Don’t avoid a great real estate deal just because your IRA is the only place where you can fund the deal. Absolutely not. I’m NOT telling you that you should NEVER buy real estate in your IRA… only that you should be biased against doing so if you have other alternatives.
And, of course, you need to speak with your own tax counsel about this. The truth is I know MANY, MANY people who have very successfully navigated the requirements of owning real estate in their retirement accounts… and are very glad they did so.
And, by the way… if you are looking for a GREAT real estate investment… I’ve got some thoughts for you on that, too! Just text the word SENDBOOK to 44222 to get a free copy of our latest ebook called the SDI Guide To Real Estate Wealth for Busy Investors where you’ll learn how to build a high-quality portfolio of turnkey rental properties that build your cash flow – and your wealth – without your day-to-day involvement… just like it should be for busy investors like you! Again, just go ahead and text SENDBOOK with no spaces, just one word, to 44222 right now.
Folks, I hope you had a very merry Christmas or are enjoying a happy Hanukkah. The coming year is going to be an exciting, exciting time for all of us, and for now, I leave you with this bit of advice… invest wisely today, and live well forever!
Hosted on Acast. See acast.com/privacy for more information.