When purchasing investment property, there can be a number of tax advantages. First, there’s the ability to write off the amount of interest paid on the mortgage each year. There’s also the potential for depreciation in the properties that you own. These alone can add up to big tax savings for property owners. What many investors tend to overlook, though, is one of the biggest potential tax advantages of using IRA funds to purchase investment property.
There are several rules that must be followed in order to do so properly. For example:
- The investor may not obtain “indirect benefits” from the property that is owned by the IRA account. This means that you, the investor, may not purchase your own personal residence, or even a vacation home or office space that you will personally use on a part-time or limited basis.
- The IRA may not purchase a property that is currently owned by the investor or a “disqualified” individual. The IRS will not allow your IRA to purchase property that you or a relative such as your spouse, parents, grandparents / great-grandparents, children (and their spouses), grandchildren, and great-grandchildren currently owns, as this would be considered self-dealing.
- The property must be uniquely titled. The property (or properties) purchased must be titled in the name of the IRA account, and not to the investor personally.
- Expenses and income must flow from and to the IRA account. All of the expenses that are related to the investment property must come out of the IRA account. For example, if you need to fix a leaky roof, the funds with which you do so must be IRA funds. Likewise, if you rent the property to a tenant, all of the rental income must flow into the IRA account. Therefore, the tenant may not make out the check personally to you, but rather to the name of your IRA account.
While there may be some additional rules to follow when purchasing property through a self-directed IRA account, the tax advantages are many – starting with the fact that you can essentially defer paying taxes on the profit for many years – or, depending on the type of IRA you have, you may never be required to pay taxes on the gain.
For more information on how to enjoy the benefits of real estate investing – without having to take on all of the tasks yourself – give us a call.
