1031 Real Estate IRA

Acquire Real Estate Through Self-Directed IRA

At DST.com, we make 1031 exchange easy for you by helping you leverage the preferential tax treatment on your sales proceeds. However, here, we’ll cover another investment tool: an IRA (Individual Retirement Account). Besides helping you provide greater tax benefits, IRAs also come with an opportunity to get into real-estate investing. So, if you are interested in real estate, this is how an IRA could be beneficial for you. We’ll start with the basics.

Self-Directing IRA: The Basics

Usually, a standard IRA is a long-term saving account where you add cash for over a period of time. An administrator is appointed to the account, who controls your tax-deferred contributions by buying securities like bonds and stocks. The goal here is to diversify your account gradually until you reach retirement. Once you retire, you have access to both- the original principal and investment returns. Self-directed IRAs are a bit different. As the name suggests, self-directed IRAs are where you are the in-charge of investing the money and not the administrator. A custodian is appointed to your account. You can ask this entity to make purchases for you through a separate account. The property purchased under this belongs to this entity and your IRA, not you directly.

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The Benefits

There are several advantages of a self-directed IRA. Here are some of them:

  • Control: This one is pretty obvious. With a self-directed IRA, you get control over your investments. However, you would have to get approval from the custodian.
  • IRS Borrowing: Self-directed IRAs help you leverage your real estate purchase. In this case, you would be represented by your IRA. So, when it comes to financing, you won’t be requesting one; your IRA would be asking for it. However, you must consider income tax implications.
  • Tax-Deferred: IRA is tax-deferred. So, all the income from real estate or sale proceeds would enter the IRA. Though investments would still be associated with market risk, the income you receive would be tax-deferred.

What You Need To Know?

Apart from the many benefits, here’s what you need to look out for:
  • Disqualifications: You can contribute cash into your self-directed IRA, but this comes with specific rules. For instance, you can not contribute towards the improvement of the IRA-account properties. Moreover, you can not spend your time or a family member’s time on the property. The IRA itself would have to fund everything through third parties. While cousins, aunts, uncles and siblings can participate, your grandparents, parents, children and spouses can not participate at all.
  • Work And Time: Self-directing IRAs would require you to spend more time and money than you would have in other IRA formats. If you fail to do so, the IRA performance will suffer.
  • No Real-Estate Tax Advantages: Any real estate you purchase through an IRA account belongs to the IRA. So, you won’t be able to enjoy tax deductions, capital losses or depreciation benefits personally.

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