Tax Tips For Real Estate Investors Using Ira Funds

Tax Tips for Real Estate Investors Using IRA Funds
You’ve seen the​ advertisements and news articles .​
IRA funds can be used to​ make real estate investments .​
But before you​ jump on​ this bandwagon,​ make sure you​ understand some of​ the​ tax planning angles related to​ this opportunity.
Passive Loss Deductions
Almost always,​ an​ important component of​ your real estate profits comes from the​ tax savings associated with depreciation .​
These paper losses,​ referred to​ as​ passive losses by the​ Internal Revenue Code,​ can save both small and professional real estate investors thousands of​ dollars a​ year in​ income taxes .​
Unfortunately,​ passive losses from depreciation and related,​ similar tax deductions won’t benefit real estate investors investing through IRAs.
Capital Gains Preferences
If you​ sell an​ investment for a​ profit—whether a​ stock or​ real estate—you get a​ tax break because your profit gets taxed at​ a​ preferential capital gains tax rate .​
In the​ best case scenario under current tax law,​ for example,​ your capital gains get taxed at​ 15% rather than at​ 35%.
Unfortunately,​ by putting real estate inside of​ an​ IRA,​ you​ lose this benefit .​
In effect,​ the​ appreciation you​ enjoy from your real estate investment gets taxed at​ your marginal income tax rate rather than at​ the​ capital gains rate .​
(Fortunately,​ the​ tax gets paid when you​ withdraw the​ money.)
Note: This problem also exists for other investments that produce capital gains,​ such as​ stocks and mutual funds that invest in​ stocks.
Unrelated Business Income Tax
In certain special circumstances,​ an​ IRA needs to​ pay income taxes on​ the​ profits it​ generates .​
These taxes,​ called unrelated business income taxes,​ essentially put the​ IRA investor in​ the​ same position as​ a​ regular taxable investor.
For example,​ if​ you’re developing and then flipping properties inside your IRA,​ you​ may actually be an​ active trade or​ business .​
And in​ this case,​ your real estate investment—even though it’s inside an​ IRA—may be subject to​ income taxes .​
(Your IRA custodian is​ supposed to​ report your taxable income and tax liability,​ and then pay the​ taxes but many don’t…)
And here’s another example of​ a​ situation where the​ unrelated business income tax can trip you​ up .​
If you​ borrow money to​ invest in​ real estate—the typical situation in​ any leveraged real estate investment—the profit you​ earn on​ the​ money you’ve borrowed is​ treated as​ unrelated business income .​
Accordingly,​ that profit is​ subject to​ unrelated business income tax.
Unrelated business income inside an​ IRA is​ taxed according to​ trust taxation rules,​ which means that as​ soon as​ you’ve made much money at​ all,​ you’re taxed at​ the​ highest marginal tax rates .​
Closing Caveats
Real estate is​ a​ great investment .​
And real estate belongs in​ any investor’s portfolio .​
But you​ need to​ think carefully about buying into the​ idea of​ using your IRA to​ make real estate investments .​
If you​ do decide to​ invest in​ real estate through your IRA,​ first consult with your tax advisor.
Tax Tips For Real Estate Investors Using Ira Funds Tax Tips For Real Estate Investors Using Ira Funds Reviewed by Henda Yesti on July 03, 2018 Rating: 5

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