Benefits of self-directed IRAs

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Benefits of self-directed IRAs

Ryan Daulton
New to Real Estate · Princeton, TX · Member since 2024 · 84 posts · 26 votes

Since learning that cash flow from real estate that was purchased from self-directed IRAs is taxed, and that I would not be able to claim depreciation on this property, what are the advantages to buying real estate with self-directed IRAs vs. other investment types like stocks and mutual funds?  

It seems like there are so many limitations to buying real estate with self-directed IRAs.  For those that do invest in real estate using this, what are your reasons?  Are there any benefits I may not be aware of here?

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Chris SeveneyBusiness Member
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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
2y

@Ryan Daulton

We use it for private lending - because the tax benefits are lost with real estate

When lending usually it’s taxed at ordinary income rates if using your own cash so using a sdira I prefer for lending and my w2 income savings for real estate to maximize tax efficiency

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  • Mohit Gupta
    New to Real Estate · Austin, TX · Member since 2021 · 6 posts · 3 votes
    2y

    Following. Just starting to research how to invest w/ SDIRAs. 

    I'm confused why would you say that rental income is taxed in an IRA? May be you meant that the IRA has deferred-tax funds and not Roth?

    How about using SDIRAs not to hold assets but to operate businesses? For example, could I use my SDIRA to operate a management company that charges my holding LLCs a management fee? Now the paper losses are still able to be realized via the holding companies while the management fees are earned tax free? I'm guessing though that since the IRA owner isn't allowed to take out a salary, perhaps the SDIRA LLC will be required to hire employees?

    0Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    2y

    @Ryan Daulton

    We use it for private lending - because the tax benefits are lost with real estate

    When lending usually it’s taxed at ordinary income rates if using your own cash so using a sdira I prefer for lending and my w2 income savings for real estate to maximize tax efficiency

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    5Reply
  • Brett SynickyPro Member
    Solo 401k and SDIRA Consultant · Orange, CA · Member since 2013 · 873 posts · 497 votes
    2y
    Quote from @Ryan Daulton:

    Since learning that cash flow from real estate that was purchased from self-directed IRAs is taxed, and that I would not be able to claim depreciation on this property, what are the advantages to buying real estate with self-directed IRAs vs. other investment types like stocks and mutual funds?  

    It seems like there are so many limitations to buying real estate with self-directed IRAs.  For those that do invest in real estate using this, what are your reasons?  Are there any benefits I may not be aware of here?

    You would only pay taxes on all passive investments in a traditional SDIRA at distribution, unless you have a mortgage, then the portion of the income derived because of the mortgage will be subject to UDFI (unrelated debt finance income) which will trigger UBIT (unrelated business income tax). This tax scales up to 37% but not till around $12,500k in income for the year. Before the income subject to UBIT is calculated you can depreciate and deduct expenses and losses on that portion of the income so generally it's not as bad as people think. So it's not correct to say you cannot depreciate real estate in an IRA.

    Bear in mind, you're not investing in a retirement account to take advantage of tax deductions, as there are no taxes. I suggest buying real estate inside of and outside of your IRA or better yet qualify for a Solo 401k then you don't have to worry about UBIT on leveraged real estate.  Additionally, keep in mind if you do this in a Roth then there are NO taxes on the appreciation, rental income or profits when the Roth liquidates the asset.  Also the loan for a retirement account must be non-recourse.  Something else to think about, when's the last time somebody gave you a loan to buy more S&P 500?   Like @Chris Seveney said, private lending is a great way to go as well.  

    2Reply
  • Brett SynickyPro Member
    Solo 401k and SDIRA Consultant · Orange, CA · Member since 2013 · 873 posts · 497 votes
    2y
    Quote from @Mohit Gupta:

    Following. Just starting to research how to invest w/ SDIRAs. 

    I'm confused why would you say that rental income is taxed in an IRA? May be you meant that the IRA has deferred-tax funds and not Roth?

    How about using SDIRAs not to hold assets but to operate businesses? For example, could I use my SDIRA to operate a management company that charges my holding LLCs a management fee? Now the paper losses are still able to be realized via the holding companies while the management fees are earned tax free? I'm guessing though that since the IRA owner isn't allowed to take out a salary, perhaps the SDIRA LLC will be required to hire employees?


     This would be a prohibited transaction since you're a disqualified party and anything you already own (your LLCs) is part of that. Additionally if you're running an active business in the IRA the income will have to pay UBIT. There are some creative ways to get it from 37% to corporate tax rate of 21% but generally it's best to invest passively as the IRA is designed.

    2Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    2y

    I personally would not buy real estate with a retirement account.
    There are just too many headaches that are not worth the potential increased return.

    Some headaches when it comes to investing in real estate with a retirement account
    1) LTV values are less and harder to find lenders.
    2) Potential to sell or partially distibute the property if you have to do a RMD(Required Minimum Distribution)
    3) If you run out of cash and have to make a major repair, you may be out of luck and have to sell.
    4) Having to potentially worry about UBTI(Unrelated Business Taxable Income)

    I would personally invest in stocks/bonds/notes with a retirement account.

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  • Ryan Daulton
    OP
    New to Real Estate · Princeton, TX · Member since 2024 · 84 posts · 26 votes
    2y

    I'm not a fan of taking out a non-recourse loan for real estate. But I think one of the best ways to use an IRA to buy real estate while minimizing fees is to partner with others so that you don't need any loan at all.

    another way I'm considering using my IRA for smaller initial investments is to invest in syndications like spark rental, where you can invest as little as $5,000 for each transaction.

    1Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    2y

    @Ryan Daulton

    That is where we have seen a lot of our investors is those who just started a sdira and have like $5-$10k in it.

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  • Rob K.
    Encinitas, CA · Member since 2011 · 191 posts · 252 votes
    2y

    Bought a triplex in 2011 with all cash in my retirement account. During escrow converted it to a Roth and paid the taxes. Nearly fourteen years later I would say it was well worth it. Tax free appreciation and rents significantly trump the loss of depreciation and custodial fees.

    4Reply
  • Account Closed
    Rental Property Investor · New Braunfels, TX · Member since 2022 · 408 posts · 408 votes
    2y
    Quote from @Ryan Daulton:

    Since learning that cash flow from real estate that was purchased from self-directed IRAs is taxed, and that I would not be able to claim depreciation on this property, what are the advantages to buying real estate with self-directed IRAs vs. other investment types like stocks and mutual funds?  

    It seems like there are so many limitations to buying real estate with self-directed IRAs.  For those that do invest in real estate using this, what are your reasons?  Are there any benefits I may not be aware of here?

    The cash flow is only taxed if you withdraw it from the SDIRA. No different than any other withdrawal from any IRA. The reason I did it is because I live in an area of the country that was exploding in 2016 and when you don't have to pay any capital gains on real estate inside a SDIRA that is a huge deal. People say don't do it but if you do it right, it can be very beneficial. Plus you can claim depreciation on any portion of the real estate that has debt on it and the gains (if you are in the right city) far outweigh the UBIT/UDFI costs. All of the information is on the internet for free. You just have to do a LOT of homework and play by the rules.
    3Reply
  • Conrado Balicusto
    Rental Property Investor · Member since 2023 · 13 posts · 5 votes
    2y
    Quote from @Chris Seveney:

    @Ryan Daulton

    We use it for private lending - because the tax benefits are lost with real estate

    When lending usually it’s taxed at ordinary income rates if using your own cash so using a sdira I prefer for lending and my w2 income savings for real estate to maximize tax efficiency




    Thank you for the insight on private lending and tax efficiency. Could you provide more details on how to get started with this approach? What is the expected return on investment, and how does it compare to syndication in terms of advantages and disadvantages?
    0Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    2y
    Quote from @Conrado Balicusto:
    Quote from @Chris Seveney:

    @Ryan Daulton

    We use it for private lending - because the tax benefits are lost with real estate

    When lending usually it’s taxed at ordinary income rates if using your own cash so using a sdira I prefer for lending and my w2 income savings for real estate to maximize tax efficiency




    Thank you for the insight on private lending and tax efficiency. Could you provide more details on how to get started with this approach? What is the expected return on investment, and how does it compare to syndication in terms of advantages and disadvantages?

     Lots to digest here. 

    1. How to get started. That is like asking how to fly a plane. There is a lot to go into it and recommend BP and youtube to learn more about the industry. My recommendation would be unless you have $100k I would not do private lending. Those typically seeking $30-$50k are for down payments or second position liens. 

    2. You can get 10-14% returns on private lending. 

    3. Advantages - greater return and greater risk than investing in say a private lending fund. In a fund you typically are backed by all the assets, when doing it yourself its one. Also can you underwrite as good as the sponsor. If you can get 8-10% in a fund is the 2-4% delta worth learning it or let someone else do it? Only you can answer that.

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    2y

    Investing in real estate through a Self-Directed IRA (SDIRA) has limitations, but compelling benefits still attract investors. The primary advantage is the tax-deferred or tax-free growth—like other IRAs, any profits from real estate investments grow without immediate tax consequences, which can significantly boost your retirement savings over time. Another key benefit is diversification; an SDIRA allows you to include real estate in your portfolio, reducing risk by spreading your investments across different asset types, which isn't possible with a standard IRA.

    Moreover, assets in an SDIRA often enjoy protection from creditors, adding a layer of security to your investments. You also have the option to use non-recourse loans to leverage your real estate purchases, though this may trigger Unrelated Business Income Tax (UBIT) on the income generated. Despite the inability to claim depreciation or avoid certain taxes, many investors appreciate the control an SDIRA offers, allowing them to invest directly in real estate and other alternative assets they are passionate about.

    I do not recommend buying tax-efficient assets like RE in the already tax-efficient IRAs.

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  • Jamie DietzBusiness Member
    Lender · Pittsburgh, PA · Member since 2015 · 175 posts · 90 votes
    2y

    The SDIRA's works real well for private lending.  Its relatively easy to manage the process once you do it a couple times.   However, educate yourself on how to lend correctly or partner with a full time private lending company to limit your risk.  

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  • Dan Mcguire
    Real Estate Agent · Shoreham, NY · Member since 2016 · 96 posts · 44 votes
    1y

    @Ryan Daulton

    The SDIRA is certainly more complicated. I did one that was a rehab in NY State. Many non-recourse lenders will not lend in NYS. It was certainly stressful to do a rehab loan (non-recourse) and refinance with non recourse loan and budget the renovations. The purpose on my end was to have an investment that could be used during retirement as cash flow tax free.

    I subsequently purchased vacant land with the account too In the Columbus Ohio area. The land is being sold as the investment is costly with all the illegal dumping and clean-up cost. I’m not sure if I’ll do any additional purchases in real estate. I may consider more passive investments , but that appears hard to come by. I was thinking about tax liens as that holds an interest.

    1Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    1y
    Quote from @Ryan Daulton:

    Since learning that cash flow from real estate that was purchased from self-directed IRAs is taxed, and that I would not be able to claim depreciation on this property, what are the advantages to buying real estate with self-directed IRAs vs. other investment types like stocks and mutual funds?  

    It seems like there are so many limitations to buying real estate with self-directed IRAs.  For those that do invest in real estate using this, what are your reasons?  Are there any benefits I may not be aware of here?


     Income is not taxed if you use a ROTH SDIRA. 

    I have 2 ROTH SDIRA's that each own multiple rental houses. 

    0Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    1y
    Quote from @Basit Siddiqi:

    I personally would not buy real estate with a retirement account.
    There are just too many headaches that are not worth the potential increased return.

    Some headaches when it comes to investing in real estate with a retirement account
    1) LTV values are less and harder to find lenders.
    2) Potential to sell or partially distibute the property if you have to do a RMD(Required Minimum Distribution)
    3) If you run out of cash and have to make a major repair, you may be out of luck and have to sell.
    4) Having to potentially worry about UBTI(Unrelated Business Taxable Income)

    I would personally invest in stocks/bonds/notes with a retirement account.

    I buy deals with cash and use a ROTH SDIRA so there are no RMD's.
    I buy at huge discounts to retail. The rent goes back into my ROTH account, builds up and then I buy another property when I can. Tax free money is huge.

    I may have 100k of instant equity so I don't care about about tax write offs. No Capital gains tax if I sell one day either.
     
    1Reply
  • Ryan Daulton
    OP
    New to Real Estate · Princeton, TX · Member since 2024 · 84 posts · 26 votes
    1y

    My problem with SDIRAs is that I don't have enough money to buy a house without a loan.  Did you partner with someone on your purchase?

    0Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    1y

    @Ryan Daulton,

    You don't have to buy a house in SDIRA without a loan; you can easily get a loan, but it must be non-recourse. Here is a list of lenders offering such financing: 

    https://www.biggerpockets.com/member-blogs/2810/50272-list-o...

    0Reply
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