Advantages of Using a Self-Directed IRA to Purchase Real Estate

Self-directed IRAs avail investors to a number of great investment choices. One of those happens to be real estate. Since the passing of ERISA (Employee Retirement Income Security Act) in 1974, anyone with the capital can invest in real estate using the tax-deferred status of their IRA. There are some restrictions to this, but these involve family members and other relatives benefiting from businesses or properties owned by your IRA trust. They constitute disqualified persons.

The Benefits of Using a Self-Directed IRA to Invest in Real Estate

Aside from the fact that real estate is an extremely hot commodity right now, there are a number of excellent reasons to use your self-directed IRA as an investment vehicle. The number one reason, of course, is that any gains you earn from properties held in your IRA are tax-deferred. You only begin paying taxes on those earnings once you begin collecting on the IRA.

Roth IRAs are a different story. You pay taxes on the contributions, but do not pay taxes on gains or earned income once you’ve cashed in the IRA.

There are a number of other excellent reasons, other than tax-deferral, for using your IRA to invest. Those include:

  • You can hold property indefinitely with your IRA
  • You can easily borrow money with your IRA using holdings as collateral
  • You have the potential to earn a higher ROI using your IRA

What Kind of Real Estate Can I Invest in Using my IRA?

There are no limitations on the kind of real estate you’re allowed to invest in using your IRA. There are only limitations on who occupies the real estate or financially benefits from its earnings. Popular types of real estate to invest in are:

  • Vacation homes
  • Residential homes
  • Commercial property
  • Duplexes
  • Mobile homes
  • Condominiums
  • Apartments
  • Apartment complexes
  • Real estate purchase options
  • Real estate notes
  • Tax lien certificates
  • Tax deeds

In other words, there is no real limitation on what kind of property you can purchase with your self-directed IRA. So long as you or your family members are not residing on the property, you can collect on the property tax-deferred.

How Much Can I Save Investing with a Self-Directed IRA?

Let’s say you put $250,000 into your self-directed IRA to invest in real estate and other ventures. Each year, you get a return of about 10% on your investment. The tax rate for taxable profits is around 25%.

Over the course of one year, your investment would have appreciated to $268,750. However, if you had invested with your IRA, that number balloons to $275,000. That’s a difference of $6,250.

Now let’s say your investment has been maturing for 30 years. Given the same rates, you would have earned $2,188,739. What would the same investment be worth in your IRA? The answer is an astounding $4,362,351. In other words, your investment is worth double what it would be if the profits were taxed yearly over 30 years.

Investing with your self-directed IRA can literally save you millions of dollars.

Last Updated: 
April 20, 2018

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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