Watch or Read

With so many options available for investment, sometimes it is difficult to keep up with the opportunities. David Moore with IRA Advantage looks at the ins and outs of Roth IRAs and purchasing real estate. Understand your options so you can achieve your retirement goals.

Is It Worth Investing in Real Estate with a Roth IRA?

A Roth IRA is just taxed money that’s growing tax-free, which is great. If you’re young, you’ve got a huge future ahead of you and lots of time to grow that retirement account, or if you’ve got some investment that’s going to have explosive growth, great.

If we’re talking about doing a Roth conversion to buy real estate, I have a hard time with that because instead of just doing the Roth conversion, if you’re 59 and a half or older, you could just take the money out. And many advisors would say, “Well, why do you want to buy real estate with an IRA when you lose long-term capital gains tax treatment, or you lose interest deductions or depreciation?”

Roth IRAs are great, but I sort of believed that they were just put in play because the government wanted your tax revenue today rather than waiting until the future. But when we’re looking at IRAs and buying real estate, any real estate investment that’s got leverage to it—let’s say if you buy a property, 50 percent loan to value, any income or gain that’s attributable to other people’s money, with an IRA, you’re going to have tax exposure with.

This is true not just with traditional IRAs, but even Roth IRAs. Now, 401k plans, you don’t have that same thing, but that’s the number one thing you’ve got to understand. If you’ve got a leveraged investment with a retirement account, one, it’s got to be IRA-compliant debt, so it’s got to be non-recourse, but two, you’re going to have tax exposure on the income or gain attributable to other people’s money.

What is a Roth IRA? How Do I Buy Real Estate with One?

If you’re looking at a conversion and you’re 59 and a half or older, I’d have a tendency just to pull the property out. And that way you’re going to get the long-term capital gains tax treatment going forward, you’re going to have interest deductions, depreciation. You wouldn’t have to have non-recourse debt on those things.

Regarding advisors talking about why would you buy real estate with a retirement account, when you lose those things I, that’s really not a statement that means anything, because there’s not an investment you can make that gives you those things. So it’s really a moot point. It’s just one of those things that real estate offers as a benefit through leverage that typically doesn’t exist.

If you’re buying the property with retirement money, you don’t get those things, but you’re not going to get it with any other investment if you pull the thing out. If you’re not using the Roth money, if you just pull the property out and now you own it, now you’ve got that situation where you’re going to get the long-term capital gains tax, so on so forth.

Consider the RMD and In-Kind Distributions

When you’re young, you’re often worried about building this account, but at some point you get to a point in your life where you’re more concerned with how you get the money out. And I believe that’s one of those situations where real property offers a tremendous opportunity for people. Because if you go buy a property that maybe you’d like to own someday, one of the big objections Wall Street World might have is that, hey, it’s not liquid. What happens if you get to a point you’ve got to take a required minimum distribution (RMD) and there’s no money there to take that RMD.

Then you’re stuck and you’re going to have a penalty. Well, yes, if you didn’t take the distribution, but why not take an in-kind distribution? Why not take a deeded interest in the property as the distribution? Or if a limited liability company owns the asset, just assign a membership interest from your retirement account to you personally? Now, if you’re taking a minority distribution, you’ve got two opportunities. One, what’s the thing worth? Two, you can discount the value up to 40 percent. Talk to your tax people about this. Gifting and discounting have been around for a long, long time. You can apply those same rules to distributions. So, the upside of an in-kind distribution is tremendous. You’ve got those huge benefits in valuation discounting.

The Opportunity with Roth IRAs and Real Estate

The downside is you’re incurring a tax liability without having the cash to pay the tax obligation. What’s the best source of money for that? Well, how about if you’ve taken the property out as a distribution, you just do a cash-out refinance of the property. The refi money pays the tax obligation. Now you own the property, now it’s out. You’ve got your distribution, you own the asset. It’s yours and you reduce the tax consequence of that distribution. I think not only is real estate not a problem with distributions, I believe it’s a tremendous opportunity. So look at in-kind distributions when you’re talking about getting stuff out. Once again, this is not a new concept; it’s been around a long time.

IRAs are a popular method of investment for retirement. But, as David notes, you need to focus on your investment goals and decide just what you want. His best advice is “pick up the phone and give us a call.” 503-619-0223