Okay, today we're going to talk about the pros and cons of holding real
estate in your retirement account. And first we'll talk about what that even means,
who it might make sense for, who it might not make sense for,
and then at the end we'll talk about the specific process of doing that.
So, we love real estate. I love real estate,
you've heard me talk about it. I love the deductions that surround real estate,
from the depreciation mostly, uhm,
it's an asset that can have cash flow, can have appreciation,
and you can typically offset the income from that with this depreciation.
I love that part of it. If you hold,
so we'll talk about the pros of holding real estate.
In, uh, holding real estate in your self-directed IRA account.
So first thing I want to mention is that this week,
there are some news that's going to be coming out from president Trump is
supposedly, and it sounds like it'll, it'll happen.
He'll be signing an executive order that will allow anyone
to hold real estate and cryptocurrency and private equity and
some other types of investments directly in a regular IRA account.
So, historically, if you wanted to hold real estate in your retirement account,
like a 401k or an IRA, you couldn't just go put real estate,
you couldn't just plop real estate into, like, your IRA account at Fidelity or
Schwab. Or E-Trade or your company for,
like, where you work, your 401k account there. It just didn't work.
You couldn't hold crypto unless it was like an NETF.
You couldn't hold crypto. You couldn't hold real estate before the process.
And actually currently, as of today. You'd need to open up a self-directed IRA
account. So there's a whole industry of companies that set up these self-directed IRA
accounts. And really all they do, they set up a little bit of paperwork.
Open this account officially and then you can hold
real estate basically in a like in this,
uh, it's like a legal entity essentially.
And that IRA, that self-directed IRA,
account would be on the deed, would actually be on the title of the
real estate. But the,
the good things about holding real estate in your retirement account,
so here's the pros. Pros are that you don't need to pull the money
out. You don't need to trigger a taxable event and have money pulled out
of your, uh, your, like, your regular IRA account.
Say you've got $100,000 in there. You don't need to pull that out,
have it be taxable, and then go and invest in real estate.
It can all be done in six retirement vehicle.
It doesn't need to be pulled out, say taxed at 20 or 30% and
now you're left with only $70,000.
And then you go invest that in there. You can actually just pull out
a hundred thousand of cash, sell it, all the, whatever investments you had in
your old account, roll it over into this new type of account.
You don't take control of the cash. You just roll it over into another
account within your self-directed IRA account.
And then you go and say you're buying a property. You transfer the money
from. That IRA account directly to the title company to buy the real estate
or buy the crypto. That's the biggest pro.
Well, that, that's one of the, the, the main benefits of it is you
don't need to sell. You don't need to trigger a taxable event and report
it as taxable income on your tax return.
The other part is that as properties say they're selling inside
of your retirement account or as values go up,
you're not paying any tax. But remember,
if it's a traditional IRA account, years down the road when you pull the
money out, it's taxable in retirement.
If it's a Roth account, it's taxable it's actually not taxable in retirement.
It grows tax-free and you can pull the money out tax-free if it's a
Roth. So, those are really the main two benefits.
No taxable event when you set up the account,
buy the real estate, pull it out. Get out of your regular funds and
buy real estate with your, with your retirement account.
So, that's one of the pros. The other one is that it can grow
tax-deferred until retirement and then you pull it out.
Those are the pros. The cons to this.
So, remember, when we first started,
I mentioned that I love real estate because of the depreciation benefits.
We can use depreciation expenses to offset the taxable income.
In a retirement account, that doesn't even matter.
Like, it, it doesn't even, that's,
that depreciation isn't even help, helpful to you because it's already not taxable.
So, it's, you don't get another benefit with that depreciation.
And, so, these are the cons.
So, you're not getting another. Depreciation benefit.
That's kind of a, almost makes the retirement account investment for real estate.
It almost negates some of that first benefit.
The other one is if, if you are in a situation where you can
use those losses for from real estate to offset income from other sources.
So you have other rental properties or say you're a real estate professional or
it's a short term rental or you've, you're an active like real estate professional
and you can actually use those losses. If they're in a retirement account,
you can't use those. You can't use those to offset your other income.
So be careful if it is not for someone that is a real estate
professional, it's not for someone that needs to use those losses or can use
those losses somewhere else. You don't want that stuck in your retirement account.
You would, you would much rather have it just come as a,
on a K-1 directly to your holding company or a K-1 directly to you.
Personally, you would be better off owning that real estate directly.
But now you might be wondering like, well, if you have no personal cash,
but you have cash in retirement account and you want to buy real estate.
Kind of the automatic assumption is like,
oh, well, let's, I don't want to get the money out of my retirement
account because I'll have to pay tax on it,
I'll have to pay a penalty on it. But I want this real estate,
so it might be a natural.
Like, inclination, natural thing you want to do is just set up a self-directed
IRA account and buy real estate without triggering the tax.
But I would, I would run a couple of scenarios first before you do
that. So run the numbers of like the actual tax.
Tax numbers to say it's a hundred thousand and depending on your tax bracket,
like run the numbers of like, okay, well maybe there is a tax hit.
Maybe it is, maybe it is $30,000 of tax and penalty
you've got to pay on the hundred. So you're left with 70,
but now if you have that 70, what if,
what if you could invest that 70,
go get into real estate, maybe leverage it or do something.
If you can create deductions.
Uh, if you're a real estate professional, if you're short term,
if it's a short term rental or kind of the typical easiest answers,
or if you have other real estate that has taxable income,
what if you could take that 70,
go invest it? In the same year that you withdrew the 100 to go
buy real estate, if you could go create deductions that offset that $100,000
of taxable income, you could could actually save, you could save yourself about $20,000
in that example. You might still have that 10% penalty,
but you could potentially save the impact from that taxable income.
And I know it's hard to maybe visualize that as a I'm just talking
through it, but run the numbers, like run a scenario of like,
okay, scenario one, if I leave it in my retirement,
I don't get the losses. It can grow tax-free. I'm paying tax on it
anyways, 20 years down the road or scenario two.
Take the tax hit now, get into real estate now.
So make sure you're running both those scenarios. And some of those things to
consider, like I mentioned, are if you can actually use the losses.
If you can't use them, then I might lean towards a real estate.
Uhm, if you don't have any other real estate with income to offset,
I'm, or sorry, I might lean towards the self-directed IRA account.
Or after Trump signs this, ah, executive order,
you might be able to do it in your regular IRA account.
Uhm, if you can use the losses though,
if you want to sell it, if you want to get into, into other
properties, if you want to bring on partners, if you want to be actively
involved in managing the property, then I'd lean towards not having it in your
IRA account. Because there are some rules there that can mess things up too.
So that's, like, the process to do that,
hopefully I'll explain that as well, of,
if, if you're doing the self-directed IRA account,
the current process. Like,
there's a, like, directedira.com or self,
if you just Google self-directed IRA, you'll see all sorts of hits.
I don't have a specific company I recommend. There's a lot of online companies
that do it, but your process would be.
You take the cash in your retirement account,
you tell where your current retirement account is,
you tell them that you want to roll over the funds into a self-directed
IRA. And so, during that time,
you'll go set up a self-directed IRA account,
it'll have a name, it'll have a tax ID number,
and that cash, you can actually,
you would still have control of the cash.
Make sure you don't get scammed. And you don't send the cash,
like, the cash shouldn't be controlled by someone else.
You can still control it, you're not just gonna go spend it on personal
things, but you should still be making the decisions on that.
And then, you would direct it once it's in that self-directed IRA.
When you go buy the real estate,
or you go, you can go get into, say, a, a raised fund,
like a syndication, where someone else is doing the,
the management. And, they tell you where to wire it,
and you wire it to them. And,
you're directly from your self, self-directed IRA account.
So, hopefully that makes sense. Those are the pros and cons of real estate.
I wouldn't automatically, and I don't automatically recommend it for everyone,
uhm, unless you can't use the losses,
or if you're out a passive investor, or you're just really,
there's no way to take the deduction and offset some of the tax hit,
and you have no other income,
real estate income to offset. But those are some,
definitely some things to consider. And then later,
later this week and next week, with whatever this executive order is,
I will release something else. Because this,
this is pretty big news. Being able to invest in crypto and private equity
and syndications, really big and post it directly through an IRA account without needing
to set up a self-directed IRA account is going to be huge.
So that's it for today and have a good rest of the day.
