Your Guide To Purchasing Real Estate Tax Efficiently With A Self-Directed IRA
The monkeys on Wall Street are sitting there wearing their suits, scratching their heads, and laughing. Why, you ask?
Because they’ve successfully fooled the majority of American investors into believing they can only invest in stocks, bonds, mutual funds or bank CDs. If you’ve fallen for this, you’re not alone. But we’re about to teach you how to break free.
Real estate is the most popular Self-Directed IRA LLC investment, particularly among our clients. Why? Because there are many advantages, tax benefits, and other little tricks which are only accessible to real estate investors who use a Self-Directed IRA LLC.
Let’s go over the biggest perks below.
Advantages of Using a Self-Directed IRA LLC to Purchase Real Estate
Income or gains generated by a Self-Directed IRA LLC are tax-deferred. Which means you can invest tax free and not have to pay taxes right away, or in the case of a Roth IRA, ever.
Tax Advantages Of Buying Real Estate With A Self-Directed IRA LLC
When you buy real estate with a Self-Directed IRA, instead of paying tax on the returns of a real estate investment, tax is paid only at a later date, allowing your real estate investment to grow quickly.
The key to investing in real estate with a Self-Directed IRA LLC is to do so when you’re earning high income (and being taxed at a higher rate.) Then when you start making less money (and get taxed at a lower rate) you should make withdrawals because your withdrawals will be taxed at a lower rate.
- Let’s say you establish a Self-Directed IRA LLC with $200,000 to purchase real estate and make other investments.
- We will assume you kept your Self-Directed IRA LLC open for 20 years and that you were able to generate an average annual pre-tax rate of return of 8% at a 25% tax rate.
After 20 years your $200,000 investment would be worth $349,572 after taxes on your earnings. Whereas, if you had made the investments with taxable, personal funds (non-retirement funds), in 20 years your investment would only be worth $320,714.
Popular Types of IRA-Funded Real Estate Investments
Below is a small list of real estate related investments you can make with a Self-Directed IRA LLC (foreign and domestic):
- Commercial property
- Residential homes
- Tax deeds
- Real estate notes
- Tax liens certificates
- Purchase options
- Mobile homes
And that’s actually the short list. There are many more opportunities available.
The Differences of Investing With a Self-Directed IRA LLC
Buying real estate with a Self-Directed IRA LLC is essentially the same as buying real estate personally. Except you have way more benefits and advantages when you do it with a Self-Directed IRA LLC.
But there are a few differences as far as the “backend” is concerned:
- All expenses paid from the investment property go through your Self-Directed IRA LLC. Likewise, all rental income checks must be deposited directly into your Self-Directed IRA LLC bank account.
- Title to the investment property and all transaction documents should be in the name of the Self-Directed IRA LLC. Documents pertaining to the property investment must be signed by the LLC manager. The manager can be you.
How To Make Real Estate Inestments With a Self-Directed IRA LLC
When using a Self-Directed IRA LLC to make a real estate investment there are a number of ways you can structure the transaction:
- Use your Self-Directed IRA LLC funds to make 100% of the investment
- Partner with your family, friends, etc.
- Borrow money for your Self-Directed IRA LLC.
Partnering with your family & friends to make a real estate purchase won’t trigger a prohibited transaction if your Self-Directed IRA LLC is set up correctly. For this reason, it’s important that you get professional help to establish your Self-Directed IRA LLC.
Also, when it comes to borrowing money, you must use a non-recourse loan. That is, unless you want to trigger a prohibited transaction and pay the taxes below.
If you do trigger a prohibited transaction, you will be paying UBTI (Unrelated Business Taxable Income) Tax. You will be taxed at the trust tax rate because your IRA is considered a trust. For 2018, a Self-Directed IRA LLC is taxed at the following rates:
- $0 – $2,500 = 15% of taxable income.
- $2,501 – $5,900 = $375 + 25% of the amount over $2500.
- $5,901 – $9,050 = $1,225 + 28% of the amount over $5,900.
- $9,051 – $12,300 = $2,107 + 33% of the amount over $9,050.
- $12,300 + = $3,179.50 + 39.6% of the amount over $12,300.
Why Should You Buy Real Estate Using a Self-Directed IRA LLC?
There are so many benefits to using the self-directed IRA LLC for your real estate investments that we have written multiple previous articles on the subject. Check out some of our top reasons to use a Self-Directed IRA LLC in greater detail. But we’ll go over the basics here. The top four reasons investors use this method include the following:
- Your gains are tax free.
- No time limit for holding property.
- Your IRA can borrow money.
- You can earn a larger rate of return on invested capital.
Royal Legal Solutions Can Guarantee Your Tax Efficiency & Compliance
As you can see, there are so many advantages and benefits when it comes to investing in real estate with a Self-Directed IRA LLC.
However, in order to enjoy those benefits you have to make sure that everything is structured correctly from a legal standpoint. The legal aspects are what matter for protecting you and your hard-earned money from the IRS.
Royal Legal Solutions can guarantee that your Self-Directed IRA LLC is set up correctly and kept up to date with all future IRS regulations. Your satisfaction is our greatest priority.
If you’re ready to start investing in real estate the smart way, call Royal Legal Solutions now at (512) 757–3994 to schedule your personal consultation.