Using IRA to buy rental property
Member since 2023 · 13 posts · 3 votes
Using IRA to buy rental property
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Realtor · Charlotte, NC · Member since 2014 · 935 posts · 467 votes
3yConsider converting your IRA into aSelf directed IRA" . Have the SDIRA buy the rental. All rents go back into SDIRA , totally non taxable event. (You get the cash flow and appreciation but not the depreciation since the SDIRA owns the rental)
26 Replies
- Realtor · Charlotte, NC · Member since 2014 · 935 posts · 467 votes3y
Consider converting your IRA into aSelf directed IRA" . Have the SDIRA buy the rental. All rents go back into SDIRA , totally non taxable event. (You get the cash flow and appreciation but not the depreciation since the SDIRA owns the rental)
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes3y
@David Green
See what Don said. Transfer it to a company like quest or advanta or another ra that allows you to self direct it and control the investment
Just be aware of self dealing and make sure you use a property manager etc.
7e investments53 Reviews - Member since 2023 · 13 posts · 3 votes3y
Quote from @Don Harris:
Consider converting your IRA into aSelf directed IRA" . Have the SDIRA buy the rental. All rents go back into SDIRA , totally non taxable event. (You get the cash flow and appreciation but not the depreciation since the SDIRA owns the rental)
Who actually gets the cash flow/rent? Does it have to go back to the SDIRA or can it go into my pocket? If it does go into the SDIRA can I withdrawl the funds? I'm over 59.5.
Thanks
- Real Estate Agent · Boise, ID · Member since 2016 · 1k+ posts · 888 votes3y
Quote from @David Green:
I'm over 59.5 so I can withdrawal money from my IRA without penalties. I have a Roth & Conventional IRA.
After watching my retirement funds drop significantly a couple of years ago due to the market I started thinkg of other ways to inveset the money.
I was thinking about withdrawing money to pay cash for a rental property. I currently own two rental properties and like having the passive income. My thinking is that the property will increase in value (similar to an IRA) so I can sell it in 10 or 15 years AND I will have had the monthly rental income during that time. I know I'll have to pay capital gains tax when I sell but I was thinking the monthly rental income will have more than made up for that.
Would I be better off just leaving the cash in the IRAs? Which would give me a better return over 10-15 years?
You can pull it out and the roth shouldn't be taxable the conventional yes. If you are going to have a larger taxable event look at what makes sense via your tax bracket. Might be worth paying a bit of interest on a smaller loan then having a larger tax bill, and pay it off the next year if you want it free and clear.
You can also refi it in 10-15 years and not sell but pull out equity that wouldn't be taxable. Like others mentioned the SDIRA is a great strategy but you have to follow the rules or it gets messy. - Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes3y
David,
You do have the option of establishing self-directed IRA and transferring funds from your existing retirement account. If you decide to transfer both accounts you will need self-directed Traditional IRA and self-directed Roth IRA, you can't combine them into one. Unless you decide to convert your Traditional IRA into Roth, which would be taxable event. It might make sense if the value dropped significantly.
All transactions you do inside of a self-directed IRA must be "arms length", meaning that you personally can't do any work on them, provide any service, or benefit from the investments in any way. Of course since you past retirement age - you are free to take distributions.
- Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes3y
Quote from @Mark S.:
@Dmitriy Fomichenko Be aware that if you do this in a conventional IRA you will be converting LTCG to ordinary income.
No you are not Mark! You are trying to compare oranges with potatoes.
You will be converting an IRA that is invested in the stock market you have no control over into potentially some real estate investments. With the latter you have much greater control over, better returns and also could use leverage to increase your returns. Regardless how you invest your IRA, stock market or real estate - the tax implications will be exactly the same on IRA distributions. You will have to pay ordinary income tax on distributions from Traditional IRA. Roth IRA distributions will be tax free.
@Dmitriy Fomichenko Yes that's correct. My point was that real estate is much better held outside a conventional IRA than in it. Of course if a person has no other assets than what is in his IRA, he doesn't have that option. But if that is an option, you certainly are better off holding real estate outside an IRA. 
- Member since 2023 · 13 posts · 3 votes3y
Starting to do some research on SDIRAs and one thing I read is that when I hit 72 I'll have to start taking minimum required distributions. What if the funds are tied up in rental properties?
- Member since 2023 · 13 posts · 3 votes3y
Quote from @Don Harris:
Consider converting your IRA into aSelf directed IRA" . Have the SDIRA buy the rental. All rents go back into SDIRA , totally non taxable event. (You get the cash flow and appreciation but not the depreciation since the SDIRA owns the rental)
Are you saying that any rent collected goes back into the SDIRA and is not considered taxable income? Even if it's a traditional SDIRA? And I can take monthly distributions tax free?
- Member since 2023 · 13 posts · 3 votes3y
Quote from @Dmitriy Fomichenko:
Quote from @Mark S.:
@Dmitriy Fomichenko Be aware that if you do this in a conventional IRA you will be converting LTCG to ordinary income.
No you are not Mark! You are trying to compare oranges with potatoes.
You will be converting an IRA that is invested in the stock market you have no control over into potentially some real estate investments. With the latter you have much greater control over, better returns and also could use leverage to increase your returns. Regardless how you invest your IRA, stock market or real estate - the tax implications will be exactly the same on IRA distributions. You will have to pay ordinary income tax on distributions from Traditional IRA. Roth IRA distributions will be tax free.
If I open a conventional SDIRA, buy a rental property, have monthly rental income go back into the SDIRA and then take the rental income as a disbursement, will I have to pay income tax on that money at the end of the year?
What if I do the same scenario but with a Roth SDIRA? I assuming that the rental income won't be taxed, correct?
I'd like to have the monthly rental income not sit in the SDIRA but instead have it as money I can use right away.
What happens if I sell the rental property in the future in both scenarios?
Conventional SDIRA, pay capital gains tax on amount over initial purchase price?
Roth SDIRA, pay no tax at all on the any of the money? - Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes3y
Quote from @David Green:
Starting to do some research on SDIRAs and one thing I read is that when I hit 72 I'll have to start taking minimum required distributions. What if the funds are tied up in rental properties?
Traditional IRA are subject to RMD, Roth IRA is exempt from RMD. The bottom line is one must plan for RMD. Ideally properties would produce enough cash flow to satisfy the RMD, but that is not always the case, you may have to start liquidating some of your properties if there are not enough cash. Alternatively you can distribute the property instead of cash as "in-kind distribution".
- Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes3y
Quote from @David Green:
Quote from @Don Harris:
Consider converting your IRA into a Self directed IRA" . Have the SDIRA buy the rental. All rents go back into SDIRA , totally non taxable event. (You get the cash flow and appreciation but not the depreciation since the SDIRA owns the rental)
Are you saying that any rent collected goes back into the SDIRA and is not considered taxable income? Even if it's a traditional SDIRA? And I can take monthly distributions tax free?
David, if your IRA owns the property - rents belongs to the IRA (not to you) and must be deposited to the IRA account. Distributions from Roth IRA are tax-free, distributions from Traditional IRA are subject to ordinary income tax.
- Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes3yQualified distributions from Roth IRA are tax-free, distributions from Traditional IRA are subject to ordinary income tax. You are free to reinvest the cashflow from properties inside of the IRA.
Quote from @David Green:
Quote from @Dmitriy Fomichenko:
Quote from @Mark S.:
@Dmitriy Fomichenko Be aware that if you do this in a conventional IRA you will be converting LTCG to ordinary income.
No you are not Mark! You are trying to compare oranges with potatoes.
You will be converting an IRA that is invested in the stock market you have no control over into potentially some real estate investments. With the latter you have much greater control over, better returns and also could use leverage to increase your returns. Regardless how you invest your IRA, stock market or real estate - the tax implications will be exactly the same on IRA distributions. You will have to pay ordinary income tax on distributions from Traditional IRA. Roth IRA distributions will be tax free.
If I open a conventional SDIRA, buy a rental property, have monthly rental income go back into the SDIRA and then take the rental income as a disbursement, will I have to pay income tax on that money at the end of the year?
What if I do the same scenario but with a Roth SDIRA? I assuming that the rental income won't be taxed, correct?
I'd like to have the monthly rental income not sit in the SDIRA but instead have it as money I can use right away.
What happens if I sell the rental property in the future in both scenarios?
Conventional SDIRA, pay capital gains tax on amount over initial purchase price?
Roth SDIRA, pay no tax at all on the any of the money?
IRA is a tax-deferred vehicle, when you sell investments inside of an IRA - there are no capital gain taxes, regardless if it is real estate, stocks, gold, etc. That is true for both Roth and Traditional. But again, when you take distribution from Traditional - you will be taxed on the amount you pull out as a distribution. - Member since 2023 · 13 posts · 3 votes3y
Quote from @Dmitriy Fomichenko:
Qualified distributions from Roth IRA are tax-free, distributions from Traditional IRA are subject to ordinary income tax. You are free to reinvest the cashflow from properties inside of the IRA.Quote from @David Green:
Quote from @Dmitriy Fomichenko:
Quote from @Mark S.:
@Dmitriy Fomichenko Be aware that if you do this in a conventional IRA you will be converting LTCG to ordinary income.
No you are not Mark! You are trying to compare oranges with potatoes.
You will be converting an IRA that is invested in the stock market you have no control over into potentially some real estate investments. With the latter you have much greater control over, better returns and also could use leverage to increase your returns. Regardless how you invest your IRA, stock market or real estate - the tax implications will be exactly the same on IRA distributions. You will have to pay ordinary income tax on distributions from Traditional IRA. Roth IRA distributions will be tax free.
If I open a conventional SDIRA, buy a rental property, have monthly rental income go back into the SDIRA and then take the rental income as a disbursement, will I have to pay income tax on that money at the end of the year?
What if I do the same scenario but with a Roth SDIRA? I assuming that the rental income won't be taxed, correct?
I'd like to have the monthly rental income not sit in the SDIRA but instead have it as money I can use right away.
What happens if I sell the rental property in the future in both scenarios?
Conventional SDIRA, pay capital gains tax on amount over initial purchase price?
Roth SDIRA, pay no tax at all on the any of the money?
IRA is a tax-deferred vehicle, when you sell investments inside of an IRA - there are no capital gain taxes, regardless if it is real estate, stocks, gold, etc. That is true for both Roth and Traditional. But again, when you take distribution from Traditional - you will be taxed on the amount you pull out as a distribution.Thank for the info.
A few other questions.
I'm over 59.5 so I should be able to withdrawl any rental income from a Roth SDIRA tax free, correct?If the SDIRA owns the home can I ever use it as a primary residence in the future?
What about money spent on fixing up/renovating a rental property purchased with an SDIRA? How is that handled? If I use my personal money can I still use it as a tax deduction or does the money need to come from the SDIRA?
I am seriously considering going this route. Just trying to do all my homework to make sure I know what I'm getting into.
Thanks,
David
- Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes3y
Assuming you had your Roth IRA open for 5 years - yes, you can take distributions tax free.
While your IRA owns the property - you are prohibited from personally using it ever, period! If you wish to convert it to your primary residence, that is possible. You would distribute the property out of an IRA to yourself, this is known as "in-kind distribution", now you personally own the property and free to do with it as you wish.
If your IRA owns the property - all expenses, fix up, etc. must be paid from the IRA, you are prohibited from personally paying any of those expenses, which would be considered illegal contribution to the IRA.
- Realtor · Charlotte, NC · Member since 2014 · 935 posts · 467 votes3y
Quote from @David Green:
Quote from @Don Harris:
Consider converting your IRA into aSelf directed IRA" . Have the SDIRA buy the rental. All rents go back into SDIRA , totally non taxable event. (You get the cash flow and appreciation but not the depreciation since the SDIRA owns the rental)
Are you saying that any rent collected goes back into the SDIRA and is not considered taxable income? Even if it's a traditional SDIRA? And I can take monthly distributions tax free?
Nope. Rent goes back into SDIRA. Non taxable . Distributions are always taxable from a traditional SDIRA but not a Roth
- 3yBrian EastmanPro MemberSelf Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
Having your Roth IRA invest in a rental property could be a good strategy. The principal of the IRA is in a secure asset that can potentially spin off tax-free rental income to you as distributions.
There are some specific rules about using IRA funds that go along with the tax-preferred status of those funds. They are entirely workable, but you really do need to understand them to approach this topic with the right mindset for success.
The best way to truly get educated will be to get on the phone with an expert like @Dmitriy Fomichenko or a similar provider of checkbook IRA programs. You will learn a lot more, a lot more quickly, and a lot more reliably, than chipping away on a web forum where half-questions and half-answers seem to dominate - just the nature/drawback of the format.
- 3yRyan KellyBusiness MemberReal Estate Broker · Austin, TX · Member since 2018 · 1k+ posts · 1k+ votes
@David Green if you want to learn about self directed IRAs, I highly recommend reading "The Self Directed IRA Handbook" by Matt Sorensen. It will answer all the questions you are asking and more. Check out his "Directed IRA" podcast as well.
Ryan Kelly Group - Keller Williams5112 Reviews - Member since 2023 · 13 posts · 3 votes3y
Quote from @Dmitriy Fomichenko:
Assuming you had your Roth IRA open for 5 years - yes, you can take distributions tax free.
While your IRA owns the property - you are prohibited from personally using it ever, period! If you wish to convert it to your primary residence, that is possible. You would distribute the property out of an IRA to yourself, this is known as "in-kind distribution", now you personally own the property and free to do with it as you wish.
If your IRA owns the property - all expenses, fix up, etc. must be paid from the IRA, you are prohibited from personally paying any of those expenses, which would be considered illegal contribution to the IRA.
Valuable information.
I watched a video on this very topic and it mentioned what you are saying, that I can't do any repairs of my own. Any and all repairs and maintenance must be paid for from the SDIRA. It even sounded like the director of the SDIRA would be the one contacting people to do repairs if needed.
Hello fellow investor,
When considering whether to invest in real estate or leave money in an IRA, there are several factors to consider. Here are a few points to help make an informed decision:
- Risk tolerance: Real estate investing involves more risk than leaving money in an IRA. While real estate can provide higher returns, it is subject to market fluctuations and requires active management. On the other hand, an IRA is typically invested in stocks and bonds, which are more stable but provide lower returns.
- Diversification: It is important to have a diversified investment portfolio. If the majority of your assets are in real estate, you may be over-exposed to this asset class. An IRA provides diversification by investing in a range of stocks and bonds.
- Liquidity: Real estate investments are typically illiquid and require significant time and effort to sell. An IRA, on the other hand, provides more liquidity as you can easily buy and sell securities.
- Tax considerations: Real estate can provide significant tax benefits, such as depreciation deductions and the ability to defer capital gains taxes through a 1031 exchange. However, an IRA also provides tax benefits, such as tax-free growth and potential tax deductions on contributions.
In general, both real estate investing and an IRA can provide strong returns over a 10-15 year period. Ultimately, the decision comes down to individual circumstances and preferences. If you have a high risk tolerance and are willing to actively manage a real estate investment, it may provide higher returns. If you prefer a more hands-off approach and value diversification and liquidity, an IRA may be a better option. It's important to consult with a financial advisor to determine the best investment strategy for your individual needs and goals.
Sincerely,
Hamlet
6 doors + investor in Connecticut
- Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes3y
Quote from @Hamlet J.:
Risk tolerance: Real estate investing involves more risk than leaving money in an IRA. While real estate can provide higher returns, it is subject to market fluctuations and requires active management. On the other hand, an IRA is typically invested in stocks and bonds, which are more stable but provide lower returns.
Diversification: It is important to have a diversified investment portfolio. If the majority of your assets are in real estate, you may be over-exposed to this asset class. An IRA provides diversification by investing in a range of stocks and bonds.
Real estate is more risky than the stocks? Give me a break! Stocks can lose half of it's value overnight. In some cases you can lose 100% of your investments without a possibility for recovery. Not so with real estate, it will never go down 50% overnight. Even in the down market when real estate may lose some of it's value, the property continues to produce rent and you can hold on to it until recovery, which always happens. Plus with real estate you typically use leverage (financing), which significantly reduces your risk and increases your ROI.
You can be well diversified with real estate: single family rentals, investing in trust deed, investing in multi-family, industrial, ground up development, mobile home parks, RV parks via syndication or crowdfunding platforms and much more.
- Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes3y
Quote from @Hamlet J.:
- Tax considerations: Real estate can provide significant tax benefits, such as depreciation deductions and the ability to defer capital gains taxes through a 1031 exchange. However, an IRA also provides tax benefits, such as tax-free growth and potential tax deductions on contributions.
If you have a high risk tolerance and are willing to actively manage a real estate investment, it may provide higher returns. If you prefer a more hands-off approach and value diversification and liquidity, an IRA may be a better option. It's important to consult with a financial advisor to determine the best investment strategy for your individual needs and goals.
IRA can be used to buy real estate, you just need to have it setup properly (hint: can use Fidelity IRA for that). Real estate can grow tax-free inside of a Roth IRA and provide you with tax-free income via qualified distributions for the rest of your life. And you don't have to use 1031 exchange inside of an IRA since it is a tax-sheltered vehicle.
I don't have a high risk tolerance, that is why I have less than 5% of my total portfolio in the stock market.
I am not willing to actively manage my real estate investments, but do have a portfolio consisted of single family rentals managed by professional property managers, commercial real estate managed by experts in the field, mortgage notes services by the broker. I do not have time nor desire to be a property manager, I'm a passive investor. Hamlet please don't be offended but the points you listed above are fallacies, and I hope you will realize that with some experience and education.
- Member since 2023 · 13 posts · 3 votes3yAnd this is what got me thinking about this in the first place. I watched my 401K lose almost enough money to cover the cost of a rental property. This happened in a matter of months.
Quote from @Dmitriy Fomichenko:
Quote from @Hamlet J.:
Risk tolerance: Real estate investing involves more risk than leaving money in an IRA. While real estate can provide higher returns, it is subject to market fluctuations and requires active management. On the other hand, an IRA is typically invested in stocks and bonds, which are more stable but provide lower returns.
Diversification: It is important to have a diversified investment portfolio. If the majority of your assets are in real estate, you may be over-exposed to this asset class. An IRA provides diversification by investing in a range of stocks and bonds.
Real estate is more risky than the stocks? Give me a break! Stocks can lose half of it's value overnight. In some cases you can lose 100% of your investments without a possibility for recovery. Not so with real estate, it will never go down 50% overnight. Even in the down market when real estate may lose some of it's value, the property continues to produce rent and you can hold on to it until recovery, which always happens. Plus with real estate you typically use leverage (financing), which significantly reduces your risk and increases your ROI.
You can be well diversified with real estate: single family rentals, investing in trust deed, investing in multi-family, industrial, ground up development, mobile home parks, RV parks via syndication or crowdfunding platforms and much more.
I have other rental properties that continued to go up in value AND supply me with a monthly income. Sure, my 401K (which has now been converted to an IRA due to employment change) will come back eventually but I'm not getting the benefit of the monthly rental income it it was invested in a rental property.
I do realize that I may have periods where I won't have a tenant or will have to cover some property damage but I feel like I'd rather take that risk than watching my IRA lose 20% in a matter of months.
BTW I use property management companies to handle my rentals. I'm completely hands off and I couldn't be happier with the way that is working out.
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