Question: If I
purchase property with non-IRA funds, I can write off depreciation but I can’t
if I buy it with my IRA. Why should I
give up what appears to be such a significant tax advantage?
This is probably the most common question we receive. Rather
than giving up the depreciation tax advantage, you are trading it for a
different and possibly better tax advantage.
Essentially, if you buy real estate with personal funds, you
can expense a portion of the cost of the real estate over the allowed time
period, usually 27.5 to 39 years. Depreciation
expense, which doesn’t require current cash (since you already invested the
cash when you initially purchased the property) lowers your taxable
income.
IRA-purchased real estate is different and carries its own
significant tax advantage. Money in a Traditional IRA has already been 100%
deducted at the time of contribution, thus there is no basis left for an
individual to deduct. Money made in a
Roth IRA, though not deducted when contributed, is tax free for the future.
Either case is better than having to depreciate the property over 27 years or
more.
The majority of our clients have money that is already in
their 401k or IRA either from their personal contributions or their employer’s
contributions. They are already enjoying the benefits of the tax-deferred or
tax free money. The only way they could use those funds to purchase real estate
personally would be to take it out of the plan, giving up its special tax
status and in the case of Traditional IRAs, cause a current income tax.
Comparing post tax money in your pocket to pre-tax or
tax-deferred money in your retirement plan is not comparing apples to apples.
Since the tax advantaged money in the plan is, in effect, not yours until you
take it out of the plan, the real goal is to grow the retirement fund as much
as possible. How will you grow your IRA?
Some investors will search for property that is likely to
appreciate in value. Our clients have invested their IRAs in land that they
figured would grow in value in the future, while others bought property to rent
out and generate a steady income.
Like all investments, due diligence is required to decide
what will work best for your IRA and its investments. New Direction IRA can
help with the administration and bookkeeping of your IRA, and will ensure your
transactions and/or conversions are done according to IRS code.
Browse our website for more answers to the most common questions and
concerns about self-directed IRAs. New Direction IRA is committed to providing you
with the best education so you can self-direct your IRA successfully.
