I Wouldn’t Use an IRA to Buy a House

This column is in response to a community member’s request. I’m about to provide information that should be used as a basis for discussion with your accountant or financial planner. I’m not either, so I’m simply sharing my opinion, NOT giving advice here.

The question I received was, “Should I use my Individual Retirement Account (IRA) to invest in real estate?” If you’re in a rush and don’t have time to read to the end, I’ll break the suspense now and tell you: NO. Now, if you want to know why, read on.

The quick, non-technical description of a traditional IRA is an account into which you deposit earnings before you pay taxes on them. These are called pre-tax dollars. You only pay taxes on those deposits and their earnings when you withdraw money from the IRA – typically after you turn 60 years old. But here’s the weird part—IRAs are more like corporations than long-term savings accounts. The IRA can own assets and you are the beneficiary of the IRA, but you own the IRA, not the assets.

This is important because of how it affects your taxes. All transactions and earnings within the IRA have no tax impact. IRAs are a good idea for most people because most people earn less when they’re retired, so when they pull money out of the IRA, they are taxed at a lower rate than when they deposited or earned the money.

Money in an IRA can be used to purchase investments (real estate, stocks and bonds, etc.). Whatever is purchased within the IRA isn’t taxed, which is a double-edged sword. When it comes to buying real estate, most people invest for the tax benefits (I’m not talking about your primary residence, but investment property).

When you purchase an investment property, the expenses and depreciation are write offs – a negative taxable income. If those are in the IRA, you don’t gain the tax benefits. On the reverse side, when you sell a piece of property, you typically pay capital gains tax, which is lower than most income tax rates. So, if the IRA owns the real estate and the property is sold, rather than paying capital gains tax, you pay nothing until you withdraw money from the IRA. The earnings from the real estate sale, then, are taxed at the ordinary income tax rate rather than the lower capital gains tax rate. Not a good deal.

Here’s the other thing. Investments are priced with tax benefits in mind, so you’re giving up income buy purchasing certain investments (like real estate) with your IRA. You do have a few choices. You could borrow money from your IRA to purchase real estate in your name, and pay interest payments to your IRA. You could use your IRA to purchase investments that don’t have tax benefits (like corporate bonds or notes secured by real estate), and then you’re gaining income but not losing tax benefits.

As I said at the beginning, this information should be a springboard for discussion, not a blueprint for how to invest. Ask your accountant or financial advisor how to take advantage of your IRA, and whether real estate is a reasonable investment for you.

Speaking of experts in their fields, on August 5, I received an email from Jim Apperson of Apperson Energy Management. He read the columns I wrote in late July about energy upgrades and he wanted to let folks know that they may be able to improve the energy efficiency of their homes for free. Apparently, if you live in Ukiah and have PG&E for gas and the City for electricity, you may be able to have wall and attic insulation installed and get 100 percent of the cost back in combined rebates.

Next time I’ll write about low down payment loans. If there’s something you’d like me to write about or if you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. Dick Selzer is a real estate broker who’s been in the business for more than 35 years.

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