How to Defer Taxes While Taking Cash out of Your IRA to Invest in Real Estate or Other Business Opportunities

July 16, 2020by John Reints0

Are you looking for a way to diversify your IRA? While stocks and bonds are popular investments, you might consider investing in real estate to generate extra income. Many individuals view real estate as an intelligent, long-term investment that protects portfolios against market volatility and inflation. 

Selecting the Right IRA

To buy real estate using your IRA, you’ll need to have a self-directed IRA that permits alternative investments. While you’ll be in charge of investment decisions, you’ll still need to select a custodian to help manage transactions and financial paperwork. 

Who Owns the Real Estate? 

When you purchase real estate using your IRA, the IRA is the legal owner of the property. The real estate’s title will be in the name of your custodian for the benefit of your IRA. If you commingle personal funds with your IRA—or otherwise purchase real estate through your IRA improperly—you might disqualify your IRA and have to pay significant tax penalties. 

Who Can Live in the Real Estate? 

Any real estate you purchase through your IRA must be purely an investment. That means you can’t buy a house for yourself, your family, or IRA service providers. Plus, you aren’t allowed to purchase real estate from any of these people. These “related transactions” might invalidate your IRA. 

Tax Consequences of Buying Real Estate With Your IRA

Luckily, any interest or rental income stays tax-free within your IRA. You can reinvest these earnings in stocks, bonds, or more real estate to keep growing your retirement account. However, because the IRA is the legal owner of the real estate, you won’t be able to deduct expenses for repairs, interest, or management costs on your personal tax return. 

Financing Your Real Estate Purchase

Many banks decline to offer mortgages to IRAs to purchase real estate. As a result, you may need to buy real estate with cash. Unless you have a large IRA balance, saving enough money to make the purchase might be challenging. Plus, because you can’t leverage the investment with debt, you might not receive as much return on investment. 

Risks of Buying Real Estate With an IRA 

If you purchase real estate through your IRA, your IRA will be on the hook for all repairs and expenses. As property ownership can be expensive, you might find yourself in a situation where you draw down your IRA balance to extremely low levels to cover maintenance costs. In such cases, you may need to contribute more than the yearly limit to your IRA, which could result in tax penalties. Plus, if you’re constantly drawing down your IRA balance, you might miss out on the power of compounding your yearly gains in conventional investments like high-quality stocks and mutual funds. However, if you have a large IRA balance and are looking to diversify, these risks aren’t as significant. 

Get Help With Tax Issues 

If you or someone you know is looking for help with tax issues related to investing, reach out to My Cannabis Accountant for assistance. We guide legal cannabis businesses through a wide range of tax, accounting, and business decisions to help them succeed. 

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