Tax-Free Real Estate Income & Gains

February 1st, 2012

A Self-Directed IRA Real Estate LLC with “Checkbook Control” is an IRS and tax court approved structure that will allow you to use your IRA funds to purchase real estate or make almost any other type of investment tax- free!

With a Self Directed IRA Real Estate LLC you will never have to seek the consent of a custodian to make a real estate investment or be subject to excessive custodian account fees based on account value and per transaction

Real Estate is an IRS Approved Investment

The IRS has always permitted real estate to be held inside IRA retirement accounts. Investments with a Real Estate IRA are fully permissible under the Employee Retirement Income Security Act of 1974 (ERISA). IRS rules permit you to engage in almost any type of real estate investment, aside generally from any investment involving a disqualified person.

A Self-Directed Real Estate IRA LLC Offers Tax-Free Growth

One of the main benefits of using a Self Directed IRA Real Estate LLC to make real estate investments is that all income and gains generated by the investment will be tax-deferred until distributions are taken or in the case of a Roth IRA tax-free!

Using a Traditional IRA to Purchase Real Estate – the Power of Tax Deferral

With a Traditional IRA, tax is generally deferred on Traditional IRA contributions and earnings until the year the IRA owner takes a distribution. For 2011, an individual under the age of 50 may make a $5,000 annual tax-deductible contribution to a Traditional IRA. Whereas, an individual over the age of 50 is permitted to make a $6,000 annual tax-deductible contributions to a Traditional IRA.

The benefits of making a tax-deductable contribution is simple. For example, if you are in a 30% income tax bracket and you contribute $5,000 to a Traditional IRA in a year, that’s $5,000 of your salary on which you’re not paying taxes on this year; so you will be able to reduce your annual income tax bill by approximately $1,500 ($5,000 x 30%). In other words, you will receive an income tax deduction for the $5,000 contribution, which will save you approximately $1500 in tax payments. By making tax deductable contributions you are essentially paying yourself to save for your retirement.

By using a Self Directed IRA Real Estate LLC to make real estate investments, the IRA owner is able to defer taxes on any real estate income or gains, thus, allowing the IRA owner to benefit in three ways. The first benefit is tax-free growth: instead of paying tax on the income or gains generated by the Self Directed IRA Real Estate, tax is paid only at a later date when a distribution is taken, leaving the investment to grow tax-free without interruption. The second benefit of tax deferral is that an IRA Real Estate investment is usually made when the IRA owner is in his or her highest income earning years and is thus subject to tax at a higher tax rate. The third benefit is the ability to defer taxes on investments in the face of increased federal income tax rates. With tax rates at a historical low (the highest income tax bracket in 1986 was 50% and in 2000 was 39.6%), the likelihood of higher federal income tax rates in the near future are significant, especially with the financial strain the baby boomer generation is expected to have on the federal budget. Thus, the ability to defer tax on real estate investments until the IRA owner is 701/2 and likely in a low income tax bracket makes a Self Directed IRA Real Estate LLC a highly attractive investment vehicle.

Roth IRAs and the Power of Tax-Free Investing

The Taxpayer Relief Act of 1997 created the Roth IRA. The main distinction between a Traditional IRA and a Roth IRA is that Roth IRA contributions are nondeductible and thus, are distributed tax-free. More importantly, the earnings in a Roth IRA may also be distributed tax-free if certain requirements are met.

The primary tax benefit of using a Self-Directed Roth IRA LLC with “Checkbook Control” to purchase real estate is that all income and gains associated with the investment will flow back to the Roth IRA tax-free! So long as the IRA holder is over the age of 591/2 and the Roth IRA account has been established for longer than five years, a Roth IRA holder is not required to pay tax when receiving Roth IRA distributions. What this means is that all income, gains, and appreciation with respect to a Self Directed Roth IRA LLC investment can be distributed to the Roth IRA holder tax-free!