Tips and Tricks of Investing in Real Estate Using IRA Money

Over the past year and a half, we have seen a significant increase in the amount of retirement funds (IRA) being invested in real estate deals. For syndicated deals that our clients put together, the portion of funds raised that Abdo Romeo consists of people’s retirement accounts increased by close to 50% in the past 18 months. I, myself, have also utilized my retirement money to invest in various real estate deals as well.

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So why are we seeing such a dramatic increase in the amount of retirement funds being invested in real estate now? This phenomenon has often been referred to as the “Perfect Storm”. Several factors that contribute to the Perfect Storm are 1) significant decreases in value of traditional retirement investments such as stocks, bonds, and mutual funds 2) the opportunities which now exist in real estate investing as a result depressed property values and 3) the new 2010 tax break that allows for TAX FREE investing using retirement accounts.

As real estate investors, we should become familiar with the opportunities now available as a result of this trend. As an investor, you may be able to tap into your own retirement money to invest in real estate deals. As a syndicator looking to raise funds, it is extremely important that you understand the impacts of retirement investing so that you may speak to your investor clients about utilizing their retirement money.

One of the greatest benefits of investing in real estate with retirement funds is the ability to defer taxes. The income generated by an investment within the retirement account is generally either tax deferred (meaning you do not pay taxes on that money until you take the money out at retirement age) or tax free (meaning no more taxes EVER from this point forward). So the benefit of investing with IRA money is your ability to let money grow year after year without losing part of it to taxes. The extent to which you will benefit will depend on the number of years you have until retirement and the number of years of compounding growth that money can go through. Another great advantage of investing in real estate with retirement funds is that generally, no additional tax planning is needed. For example, since there are no taxes due currently on the monthly income, then we eliminate the need to do cost segregation studies to accelerate depreciation. Also, because of the tax preferred treatment of IRAs, there is generally no need to deal with Section 1031 exchanges on your real estate when you sell it because all the transactions within the retirement account is already tax deferred!

Having said that, there are pitfalls to watch out for when investing in real estate with retirement money. For someone who is a high income taxpayer investing in an apartment building with a lot of depreciation benefits, it may make more sense to make that investment outside of his or her retirement account in order to utilize the depreciation benefits against all their other income. Or if an investor plans to eventually move into a property, it may make sense to stay away from tapping into retirement money for that particular property.

For those of you considering real estate investing with retirement money, the first step is to meet with your tax advisor. Your tax advisor should be able to guide you and help you to determine whether the particular deal you are contemplating is an ideal fit for your retirement money to invest in. They can work with you to analyze different scenarios and determine the amount of benefit you can expect to receive in the long run. If you determine that it is beneficial for you to invest in real estate using retirement funds, the next step is to contact a custodial company and set up a “Self-Directed” retirement account. With the help of your tax advisor and your IRA company, you should then be ready to utilize that money to start investing tax efficiently in real estate and significantly increase your return on investments.

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