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In a self directed IRA you can buy real estate as many people know. The best way for a person about to retire to setup a substantial income stream for life is to buy real estate from your IRA and then rent the property. The rental income can be your retirement income tax free if you are over 59 1/2 and have had the account open 5 years or longer. This article explains why they should use a Roth IRA rather than a traditional IRA to do this.

Normal tax laws have always made real-estate a good tax shelter. Since real estate is generally purchased with a mortgage, tax laws allow you to deduct the annual mortgage interest as well as your real estate property tax. In addition, selling profits are taxed at long term capital gains rates. Owners who live in their property are can exclude up to $250,000 of gain if you’re single and $500,000 if you are married. Those that rent out their property for rental income can additionally depreciate their property yearly for a further annual tax deduction. This, along with the mortgage, property tax and maintenance expenses deductions, can actually shelter the rental income from tax and perhaps other income they receive too.

In some instances, these tax benefits are often too advantageous versus buying and holding rental income property within an IRA. IRA tax rules wipe out the typical real estate tax advantages mentioned above and all real estate deductions are eliminated. And, you can’t live in any property you own within your IRA. However, for individuals about to retire, you can create a substantial income from putting property in a Self Directed IRA. Traditional IRAs only defer taxes on annual real estate rental income. And that, along with all other property gains, will be tax at your income rates when you withdraw them. However, I think that Roth IRA tax rules offer a better alternative and are more competitive with the usual real estate tax advantages. That’s because all yearly earnings and withdrawals are tax free and there’s no minimum required distributions after turning 70 1/2 either as with a traditional IRA.

Let’s consider the advantages for seniors who buy rental investment real estate within their Self Directed Roth IRA when they invest in high rental income real-estate that will significantly appreciate over time. First, they can pull their real-estate investment rental income out tax free for their annual use. A key advantage is that Roth withdrawals won’t produce higher taxation of their Social Security income or loss of some of its benefits. Second, seniors often don’t have a high income themselves. So, they don’t reap much for sheltering income that depreciation, tax and interest deductions would present if bought outside the Self Directed IRA. In fact, seniors receive social security income which is only partially taxed or not at all. Third, when their Roth IRA real estate investment values increase over the years they can do one of several options in a tax free environment. One option is to sell that real estate within their IRA and take out all the cash in any amount tax free. Another option is to distribute that real estate out of the IRA for their own use and if meet the criteria this is tax free as well. If they sell it sometime in the future, its basis for determining capital gains tax would be their total contributions to the Self Directed Roth IRA for real estate purposes. Finally, they could leave the real estate in the Roth IRA so their beneficiary can reap further appreciation of it. The beneficiary must follow required minimum distributions for inherited IRAs but whatever they do take out will be tax free.


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