Depreciation of Real Estate IRA assets

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.

Is it expensive to have a Real Estate IRA?

Question: Is it expensive to have a real estate IRA? Won’t I have to pay a ton of custodial fees to manage a real estate IRA?

It’s not expensive to invest your IRA in real estate. At New Direction, we have a structured fee schedule so you’ll know exactly what you have to pay and when. These fees include a one-time startup fee and no fees until you make your first transaction.

Some people say that because brokers and banks generally only allow traditional investments in your IRA like stocks and bonds, that non-traditional investments somehow cost more money. But any account has costs. We encourage you to do your due diligence and check out fee schedules for securities-based IRA providers and compare that with how much money you can make with a smart non-traditional investment in real estate or precious metals. 

If you want to hold real estate with your IRA, you’ll have to find a provider like New Direction that specializes in holding real estate. There will be different costs than those charged by traditional IRA providers, but we’re confident our fees are competitive—and many times they are lower. In short, you don’t need to pay extra for the privilege to invest in non-traditional assets like real estate with 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 we receive. New Direction IRA is committed to providing you with the best education so you can self-direct your IRA successfully.

Can a Real Estate IRA benefit from a 1031 exchange?

Question: Can a real estate IRA benefit from a 1031 exchange?

IRAs don’t normally have any need for a 1031 exchange although they are allowed to do so if needed to decrease taxes.  Money in an IRA can generally move tax free from one asset class to another, so a 1031, which allows you to defer any taxable gain on exchanges of like-kind assets (like real estate for real estate), is rarely needed.

However, IRAs may have taxable income (and taxes) when assets, including real estate, are purchased with debt financing.  In that specific case, the IRA may take advantage of the 1031 rules and exchange the first debt financed property for another.  We usually see that exchange being real estate for real estate.  The result is that all or most of the IRA income taxes are deferred.

An IRA may borrow money from a bank to purchase property; an IRA with $100,000 can have the buying power of $300,000 or more. Leverage is seldom, if ever, available with securities investments in IRAs—another benefit to non-traditional IRAs.

Many of our clients believe that investing in a cash flowing real estate property with funds they have available in their IRA maximizes the value of their account. Many of them selected real estate as an asset after being unsuccessful with more traditional retirement investments. They are making their own best investment choices given their unique knowledge and experience using their own retirement funds. They generally are already doing similar investments with their non-IRA funds, which is where they got the experience in the first place.

But 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 we receive. New Direction IRA is committed to providing you with the best education so you can self-direct your IRA successfully.