Why You Shouldn’t Invest Your Self-directed IRA in Real Estate

You might ask yourself, “With housing prices and interest rates so low, isn’t it a good time to invest my IRA in real estate?”

Think twice before you do. There are a lot of disadvantages when purchasing real estate with your IRA funds even if you think property prices have bottomed out and you feel strongly that real estate is a good investment.

Higher tax rates – When you sell real estate within an IRA, any gain distributed is taxed at ordinary income tax rates. This rate can be much higher than the capital gains rate you would pay on the sale of real estate outside of the IRA.

No Depreciation – If you purchase a building with taxable (non-IRA) funds, you get to write-off depreciation. This is not the case with an IRA. Depreciation is a significant tax advantage, so why would you want to give it up?

No step-up in basis – Normally, if you die before the sale of investment property, your heirs would get a step-up in basis. 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 full amount of the sale at their ordinary tax rate.

Valuation – When you reach age 70.5, you are required to start taking Required Minimum Distributions (RMDs) from your IRA. The RMD amount is based on the value of your IRA assets as of 12/31 of the previous year. If you own real property, you would have to pay to get it appraised every year.

Liquidity – You would need to have enough additional funds in the IRA to take the RMD distribution every year starting at age 70.5. Which is not easily done if all of your IRA is invested in real property.

Personal Use – You can’t use the property for personal use, even if it’s a time share. You can’t rent if to lineal descendants.

Custodial Fees – Brokers and banks generally only allow traditional investments in your IRA like stocks and bonds. If you want to hold real estate, you’ll have to find a custodian that specializes in holding real estate. You’ll pay extra for that privilege.

Expenses – It is important that you only use IRA funds for all expenses associated with the property including taxes, repairs, and insurance. If rents don’t cover these costs, your IRA may be disqualified by the IRS.

Unrelated Business Taxable Income (UBTI) – If you purchase real estate within your IRA subject to a mortgage, you may be subject to UBTI, requiring the filing of a tax return and paying taxes on the income.

If you want real estate assets in your IRA for diversification, you can avoid all of these restrictions by purchasing shares in a Real Estate Investment Trust, real estate ETF, or real estate mutual fund. These are readily available through your current investment advisor or custodian.

About the author

Russell D. Francis, CPA, CFP®

Russell D. Francis, CPA/PFS, CFP® started Portland Fixed Income Specialists, LLC in 2012. Portland Fixed Income Specialists is an Oregon fee-only Registered Investment Advisor. We do not accept commissions for financial products or referral fees. Every decision we make is based on the best interests of our clients.

We simplify the financial planning process for you by carefully considering how it applies to your unique situation. We then provide you with the information, advice and alternatives necessary to align your financial decisions with your values, needs, and goals in life. The benefits of this approach are many – you enjoy a greater understanding of the choices you make and are confident when implementing those choices.

And, because we’re a Certified Public Accounting (CPA) firm as well as a Registered Investment Advisor, you benefit from our knowledge of the complex relationship between investments and taxes.


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  • Just the information I’ve been looking for. I have a real estate IRA can see the problem is now that I’m approaching mandatory distribution age. My appreciation is taxed as ordinary income and no depreciation two big problems here. Now I think I’m going to turn it into a Roth IRA

  • This article gives the impression that there are no advantages to using self-directed IRA funds in Real Estate ventures. Or rather, the title does. Wouldn’t “Cons of etc., etc,” with a caveat outlining some potential Pros be more honest? For instance, you don’t clarify that profits paid directly back to the IRA (not taken in distribution) are exempt from capitol gains — an actual tax advantage.

    You clearly give the impression that at no time would a person be anything other than a fool, if they were to use IRA money for Real Estate ventures. I think that’s unfair to your readers, and perhaps even a little bit lazy.

  • Amaze, awesome website layout! Precisely how prolonged are you currently posting for? you create writing a blog glance easy. The whole search within your site is fantastic, together with the information!

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