When it comes right down to it, why would you make a down payment of 40 %, 50 % or even more on the purchase of real estate with your IRA money or other retirement funds, when you can buy the same property with a down payment of 20 % or 25 % of conventional funds?
In addition to the higher down payment requirements, the interest rates are higher for‘ nonrecourse’ loans. The IRS requires the investor to use these specialty loans when buying real estate with funds that haven’ t been taxed except in the case of a Roth IRA or some 401k’ s. Most, if not all investors, ask these same questions. The main reasons are quite simple once you know and understand the facts involved in the transaction.
First and foremost, IRA money, is money you can set aside to invest in just about any type of investment you want to invest in. You can deduct the amount you put into your retirement account from the regular income you report to the IRS. This can be as much as $ 7000 if you’ re under 50 years of age or $ 8000 if you’ re over 50. If you’ re selfemployed you can put aside a
Image from Canva Pro
lot more than that depending on your annual income. Whatever amount you decide to put into an IRA or 401K or other retirement account vehicle like a pension plan, you can deduct that amount from the income you earn on an annual basis. This will reduce the taxes you have to pay when it comes time to file your tax return. I’ m sure that most of you reading here already know this? It is common knowledge.
Real estate is very tangible. You can see it, feel it, touch it and even stand on it. In general, real estate is a solid investment that stands the test of time. It goes up and down in value but in the long run, it almost always goes up in value. That goes for the income the rental property generates along with the value of the real estate itself.
Before I get into the real tangible advantages of IRA investing in real estate, you should also keep in mind that it’ s much easier to qualify for this type of loan than a conventional loan. The main qualifier for a‘ nonrecourse’ loan is having a property that has a good enough rental income to exceed the monthly expenses by a minimum of 2025 %. However, with a conventional mortgage, more often than not, you have to show prior years’ tax returns, proof of your
income, your assets and have a good credit score to get an acceptable interest rate. Therefore, this just makes investing your IRA in real estate that much more attractive.
Now to the main advantage( s) of this investment being more interesting and providing the strongest reasons for investing your retirement dollars in real estate than other risk related investments.
There are two types of tax categories when owning real estate in one’ s selfdirected IRA account. If you own the property in your Roth IRA account, you will not have to pay any taxes on the income the property generates or the capital gain profits you derive from the property when you sell it. If you own real estate in a Solo 401K, your income from the property and / or your capital gains when you sell it flow back to your account tax deferred until such time that you decide to withdraw the funds for personal use in retirement.
Most investors have selfdirected IRA’ s, not Roth IRA’ s or 401K’ s. Those investors with 401K’ s usually cannot use them until they leave the company they work for. The exception to this is those investors who are selfemployed and set up their own 401K called a Solo 401K or some other form of selfdirected pension plan.
Image from Canva Pro
66