Using Self Directed IRA to Invest in Real Estate

The fact that you can invest in real estate using self directed IRA must be widely known by now, but to my surprise, that is not the case. Many people still do not know that they can do variety of investments using their IRA other than stocks, bonds and mutual funds.

So what else can you invest using your IRA? The possibilities are endless, for examples, real estate, trust deeds, partnership interest and private equity. According to Internal Revenue Code Section 408, the only prohibitions are investing in life insurance and collectibles such as artworks, stamps and antiques.

If you want to invest in real estate using your IRA account, first you have to open a self directed IRA account with one of the IRA custodians. Here are few that you can consider (this is by no mean an endorsement of these companies):

• Pensco Trust Company
• The Entrust Group
• Equity Trust Company
• Sunwest Trust

Before you jump or run to open a self directed IRA account, consider the advantages and disadvantages below.

Advantages:
• Exposure to wide variety of investment vehicles
• Interest free loan from Uncle Sam, since the growth on your account won’t be taxable until you retire.

Disadvantages:
• The gain from real estate appreciation will be taxed as ordinary income during your retirement, versus capital gain, had the asset been held outside IRA. This is a disadvantage if you think your tax bracket after you retire will be higher than capital gain rate.
• Since your rental income is not taxable, you can’t deduct paper loss as a result of depreciation.
• You should have enough cash in your IRA for unexpected repairs.
• Mortgages might be hard to obtain.
• IRA custodian companies charge fees for managing your account.

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