Physical Real Estate In Your IRA…Don’t Do It…


Not sure what drives people to unnecessarily complicate things that don’t need to be and in this case, it pertains to buying physical real estate in their IRAs. The decision to do this most likely emanated from some kind of an infomercial or a sales pitch they came across because if they really find out just how bad an idea it is, they’ll never do it.

Rental real estate can prove to be a decent supplement to your fixed-income needs over time but doing it in your IRA, never. The advantages of doing it the traditional way are so numerous that doing it any other way just does not make sense. Listing them in no particular order…

1. Owning it outside your IRA means you own it personally and that means you have a lot more freedom and flexibility. Maybe you want to move into that property someday or pass it down to your heirs. When a rental is in a retirement account, you can’t do any of those things. You can’t move into it, can’t gift it to your kids, none of that because…that is a prohibited transaction.

2. When you own the property personally, you can depreciate it. Residential rental properties can be depreciated over 27.5 years. Your rental income gets offset by property taxes, depreciation and mortgage interest. And there are more tax benefits for folks making under $150K. You own that inside your IRA, you don’t get none of that. Everything coming out will in fact be taxable as ordinary income.

3. You own the property personally and it appreciates in value and you sell, you get to pay tax at capital gains rate. Capital gains are always and will always be lower than ordinary income tax and depending upon when you sell and how you structure the transaction, your capital gains tax can go down to zero. Contrast that with owning that property inside your IRA and you are guaranteed to pay tax at your income tax rate.

4. You’ve owned this property personally for decades and now you are sitting on half a million dollars in appreciation and you get hit by a bus and you die, your heirs get a stepped up in tax basis. So they get to inherit that property at the new basis, they get to depreciate it all over again with the same tax write-offs you enjoyed with no estate taxes to pay. Unless you happened to accumulate a sizable estate ($11 million combined between you and your spouse) which most people don’t. You own that property inside your IRA and you get hit by a bus, that money is coming out of the IRA at the beneficiary’s ordinary income tax rate.

5. Did we say that you are not going to be able to benefit from today’s ultra-low rates to buy that property inside your IRA. It’s not you who is borrowing the money; it’s your IRA custodian. You are a lender and you will make a loan at 4% to an IRA custodian? Nah…that ain’t gonna happen. You are going to pay hard money rates to borrow in your IRA. And trying to make the long-term math on rental real estate work in your favor without adequate leverage…that ain’t gonna happen either.

Can you still own real estate in your IRA? Of course you can. The only way we know is through REITs. Any other way is the wrong way

You want to have better control on when, where and how you invest in real estate. Partner with us. We are going to do it the right way with a solid business plan for each and every investment we make in the coming years. But that again is not going to be through your IRA.

Happy Investing.