Self-Directed IRA/401k Objections…
For more than a decade now we at IRA Advantage have been establishing truly Self-directed Retirement Accounts for our clients, and through those years we have run into a common collection of objections from various tax, legal or financial professionals… When contemplating a Self-directed Retirement Account you will often run into the following objections:
Why would anyone want to use IRA or 401k funds to invest in Real Estate when you lose long-term Capital Gains Tax treatment?
Though this statement is true, can anyone name an investment made with a Retirement Account that receives long-term Capital Gain’s treatment? Any investment made with a retirement account will receive the same tax treatment. Furthermore, debt free ROTH Real Estate investments (as any other IRA/40investments made with ROTH funds) will never have tax exposure…
IRA and 401k funds used for Real Estate investments cannot be leveraged
This statement is completely false. Any IRA or 401k Real Estate investment can utilize leverage and often they do. The loan must simply be a Non-recourse IRA/401k compliant loan. Please note, income and gain attributable to other people’s money (i.e. the loan) is taxable for any IRA but NOT to a 401k.
Lose Interest Deductions and Depreciation
While this is partially true, nothing purchased with a retirement account receives these benefits. Why I stated it is partially true is that any IRA owned parcel of Real Estate purchased using leverage will have tax exposure on the income and gain attributable to other peoples money and this is called UBTI (Unrelated Business Taxable Income). The Investor’s Retirement Account will be subject to whether a seller carry back or bank loan. As stated above, any loan to a IRA or 401k must be non-recourse.
Anyway, to offset the tax exposure triggered by the leverage it is possible to utilize depreciation and expenses. Furthermore the gain can be deferred using a common 1031 Exchange. Please consult your tax or legal counsel for further details.
What about RMDs?
This issue is often raised because people typically do not consider the use of “in-kind” distributions. Since Real Estate is typically considered to be a non-liquid investment people will look at the issue of Required Minimum Distributions (RMDs) and state “what happens if an RMD is required and there are no funds available to take it?” A simple solution that not only eliminates the problem but offers tremendous opportunities is to take in-kind distributions!
By Taking the In-Kind distribution you not only satisfy the RMD issue but you open up several opportunities:
1. Valuation of the Asset- What is it worth?
2. The ability to “discount” the value of the distribution. Discounts can be as much as 40% if a “minority interest” is distributed.
3. Ability to transfer a desirable asset out of a plan and to you! If you love an investment owned by a plan, you cannot buy it but it can be taken as a distribution…
Ultimately a Self-directed Retirement Account simply allows an Investor to further diversify his/her investments. Most of our clients come to us with the desire to move some retirement funds into Real Estate, something that is easily accomplished. Diversification is something that is always a good idea, Real Estate is Real Investment!
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David and Thomas Moore, the co-founders of Equity Advantage & IRA Advantage
Whether working through a 1031 Exchange with Equity Advantage, acquiring real estate with an IRA through IRA Advantage or listing investment property through our Post 1031 property listing site we are here to help Investors get where they want to be. About Us…
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