Question: When you receive an IRA distribution of cash that
was made from the sale of real estate, it is taxed at ordinary income tax
rates. Isn’t this rate much higher than the capital gains rate you would pay on
the sale of real estate outside of the IRA?
Yes, Traditional IRAs give you a tax deduction for
contributions and you pay taxes on distributions. Both are at ordinary income
rates which are higher than capital gains rates. This is true for any IRA
asset, not just real estate. Even if
your IRA invested in securities like stocks and mutual funds instead of real
estate, distributions of any gains will be taxed ordinary income tax rates.
If your goal is to minimize taxes at distribution you may
wish to convert your existing Traditional IRA to a Roth IRA. Distributions from Roth IRAs are generally
tax-free. Conversion may be done at any
time; income tax at ordinary income will be due on the converted amount. Many
investors feel the Roth IRA is a much better long term plan as the taxes are
effectively prepaid on the money. Both
contributions and the income and profits are withdrawn tax free.
Recently, much of the appeal of real estate investing is the
positive cash flow it can generate. For IRAs owning real estate, generating
income can make it an attractive option even without the potential for
appreciation. The tax your IRA may incur at the end of an investment is only
one factor to consider. Smart investors can generate significant revenue from
rent. Cap rates of 4 to 10% are not uncommon and, when compared to returns from
other assets, can be very enticing for investors in today’s economy.
In many cases, income generated from real estate assets can
cover any Required Minimum Distributions (RMDs) required for Traditional IRAs
at age 70 ½ .
Remember, the point of owning real estate or any asset in an
IRA is to increase the total value of your IRA.
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.
