Self-directed IRA real estate is among the most popular alternative assets. However, it’s not for everyone. We’ve already given you a helpful overview of what a self-directed IRA for real estate investing is. Below is a closer look at the pros and cons of this type of investment. Read on to find out if this growing investment option is right for you.
Real estate as a non-traditional asset can lead to higher returns. According to Investopedia: “Real estate has outperformed the stock market approximately two to one since 2000, earning 10.71% annually versus 5.43% for stocks (1).” This is not always the case. However it can explain why according to a 2014 Morgan Stanley Survey, real estate is the most popular alternative asset class among millionaires (2).
Real estate investment gains are tax deferred. When real estate is purchased outside of a self-directed IRA, gains are taxed at the federal and sometimes state tax level. In contrast, gains on self-directed IRA real estate are taxed when those funds are withdrawn. This can occur after decades of unhindered growth.
Unlike traditional IRAs, a self-directed IRA real estate investment can be more familiar and manageable. Global conditions and political factors often increase the uncertainty of stocks. Real estate as a physical and often local asset offers a more manageable alternative. Plus, when combined with checkbook control through an LLC or business trust, transactions aren’t subject to administrative control from a faraway custodian. Investing can be as easy as writing your own personal check.
A self-directed IRA doesn’t include a separate entity who will perform due diligence on each transaction. The custodian’s role is as a “passive custodian.” She may have real estate investing experience, but this doesn’t mean that your investments are vetted. We can help simplify self-directed IRA access to real estate and other private investments, so you can focus on performing your due diligence.
A common mistake when dealing with this particular form of investment is “self-dealing.” This includes any transaction that unfairly benefits the owner of the IRA or any of her family members. Examples include renting out an IRA owned rental property to a child or paying yourself for rental property management. A mistake like this can lead to a taxable event or even worst jeopardize the status of your IRA.
The self-directed IRA real estate investment can offer high returns, tax deferrals and an increased sense of control over investments. However, these benefits come with a responsibility to complete due diligence on all transactions and be aware of “self-dealing” rules. We’ve streamlined the self-directed IRA investing process so that you can focus on these responsibilities. Contact us today for more information.
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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