Wednesday, August 14, 2013

Step-up in basis of Real Estate IRA assets



Question: If I die before the sale of my investment property, will my heir be able to benefit from step-up in basis and pay fewer taxes?

Step up in basis at death is not available for a Traditional IRA’s assets, including any real estate it owns.  Normally, if you die before the sale of investment property, your heirs would get a step-up in basis, meaning they could sell it immediately and pay no tax. If it is in an IRA, there is no step-up in basis and they would pay taxes on the amounts distributed from the IRA at their ordinary tax rate.

However, the goal for any retirement plan is to maximize its value.  If real estate assets achieve a higher return than any other investment available, then that should be the investment of choice.  
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Alternatively, this issue can be solved by converting the Traditional IRA to a Roth IRA.

Step up basis is not a concern for Roth IRA owners who invest their IRA in Real Estate because their taxes will have already been paid, either in the year of contribution to the Roth or at the time of conversion from Traditional to Roth. Plus, those benefits pass to the beneficiaries of the account.

The recent relaxation of Roth conversion rules has led to a surge of account holders electing to pre-pay their future income retirement income tax by converting from Traditional to Roth IRAs. This legislation is beneficial to investors who believe they will pay fewer taxes by converting their IRA now than they will upon distributing their Traditional IRAs at retirement age.

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.