Dangers of owning real estate inside your retirement account


With the real estate market being in the toilet, have you thought about using IRA money to get into real estate? Every time I get this call on the air, I pour cold water on it. Gallons of the stuff!

Real estate remains advantaged in our tax code beyond the pale. There are so many advantages to owning it outside a sheltered account that you lose the benefit if you own it inside a retirement account like an IRA. (Not to mention that everything in an IRA is subject to ordinary income tax, which is the highest tax rate.)

Let’s say you do decide to use your IRA as a funding source. If you do well with the property and you go to sell, the money coming out of the IRA is taxed at the highest possible rate. Contrast that scenario with one in which real estate is owned just on its own, in which case it’s subject to very favorable capital gains tax rates.

And consider this: Down the road when we have a true recovery, and you’ve bought whatever it is for mostly cash or all cash, well, you can’t monetize that by taking out a mortgage inside an IRA. In fact, you can’t free up the capital at any point.

There are so many complications you bring to life when you do something trying to make a square peg fit a round hole! Using an IRA to own property is not a good plan in my book.

The real opportunities now are for people who are willing to put in their own time and sweat equity to do repairs and improvements on traditional investment properties. I keep hearing these stories about people buying beat up homes for the price of a car, around $20,000 or so, and then fixing them up.

I want you to think about owning real estate that way instead of the latest gimmick of doing it through your IRA.  

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