Jason Craig, President, The Entrust Group, recently sat down with RISMedia for a Q&A to shed some light on the tax advantages of Real Estate IRAs.
RISMedia: Are the expenses for a real estate IRA investment property a tax write-off?
Jason Craig: What happens in an IRA stays in the IRA. A traditional IRA that invests in real estate and has expenses is not deductible to the IRA holder since the IRA is the one holding the investment and not the IRA holder personally. On the other hand, IRA-owned real estate that has rental income is not taxable until the income is distributed from the IRA. Sale of real estate owned outright by the IRA is also not subject to capital gains when the real estate is sold while under the IRA. This may provide more capital to purchase more properties since the taxation of the earnings is tax-deferred. If the IRA is a Roth IRA, the rental income and gains on the sale of the real estate is not only tax-deferred but also may be distributed tax-free in the future. An investor must decide whether letting go of the expense deduction by owning the property under an IRA is a better financial proposition than owning the real estate personally.
R: How are property taxes paid for a property in an IRA?
JC: Since the IRA owns the investment, all expenses related to the real state asset must be paid from the IRA and not the IRA holder personally. If the IRA lacks liquidity, additional funds may be added via annual contributions or transfers from other IRAs. Before purchasing real estate under an IRA, the IRA holder must pay careful attention on how real estate expenses will be paid from IRA funds. Factors such as real estate income and available cash in the IRA must be put in consideration and compared to the liabilities of the real estate such as real estate taxes, maintenance and other services.
R: How can real estate professionals assist their real estate IRA clients (and potential clients) during tax time?
JC: Every year the IRA administrator must report the fair market value of the IRA to the IRS. If the agent is the IRA holder he/she must assist the IRA administrator to obtain the correct fair market value (FMV) of the investment for the administrator to satisfy its reporting obligation. Although an appraisal is the ultimate method getting an accurate fair market value other methods are used as best practice. However, ultimately if being used for distributions or RMD calculations, it is conservatively recommended to acquire a real estate appraisal.
R: Why is January through April the most active time for Real Estate IRA investors?
JC: We’ve experienced that during the first few months of the year people are focused on tax deadlines and how to take advantage of tax write-offs. This is the time when people open a new IRA or contribute to an IRA to get the tax benefit. For IRA investors interested in real estate investments, they will focus on opening or transferring money to a self-directed IRA with the intention to purchase real estate. At this point most clients have already identified either investment property type or actual property. In fact, we do more real estate purchases in the beginning of the year than any other season.
Find out how you can generate more referrals, leads, and repeat business with your free download of How to Help Your Clients Invest in Real Estate Tax-Free.
For more information, visit www.theentrustgroup.com.
