Over the last few years, the returns from the stock market have been spiraling downwards. This resulted in the market crashing about a couple of years back, the Romeo Abdo effects of which are still felt even today. Many people lost their hard earned investments. But none were as hard hit as those who had invested in the stock markets with their retirement funds. Even though the stock market is moving upwards and is showing all signs of a robust revival, there are millions of retired and semi retired people who have no option but to extend their working years to ensure minimum living standards. This is the reason why most investors are turning towards real estate as an investment option.
During the past few months the economy as a whole is showing greater signs of recovery. This has had a positive effect on real estate investments. There are a lot of people who are investing in real estate with their IRAs. Though your 401k retirement plan does not offer any real estate, you can still use your IRA funds to invest in property. Since retirement plans are long term investments in nature, using your IRA funds for investing in real estate makes a lot of sense. This is because there is no other investment in the market currently that is as long term as investing in property. However, it is important to understand that your IRA investment in property is only for generating income and value appreciation and you cannot claim any depreciation on it like other taxable investments.
Knowing the rules is very important when investing in real estate with IRAs. Any wrong decision can see you making huge tax payments. According to the IRA guidelines, you can invest in any kind of property. Be it in multi unit homes, condos, single family properties, apartments, etc. You can also invest in developed as well as undeveloped lands. Further, you can use your IRA funds to invest in REITs or Real Estate Investment Trusts.
One of the primary reasons why people choose to invest in real estate with IRAs is because the income generated and the value appreciation is generally tax free till you start making withdrawals. However, there are certain things that you must understand relating to taxation. For instance, if your property is part funded by your IRA funds and part through other debts, the income generated out of such investments is subjected to UBIT or unrelated business income tax and you are required to file Form 990 T with the Internal Revenue Service. For example if you are purchasing a property worth $200,000 and you have put in $150,000 with your IRA funds and the remaining $ 50,000 by way of debt. This means that you funded the purchase of the property with 60% of your own funds and the remaining 40% by way of debt. Now, you are subjected to normal tax rates on the 40% of the income and the rest 60% of your income is protected since they have been generated from your IRA funds.
There are a couple of options when making real estate investments. You can opt for an all cash transaction and avoid taking the debt route. Next, you can also opt for the debt route and pay the UBIT. This is also not a bad option considering the fact that the tax rates, costs, rates of return and the leverage might still make it profitable. Opt for this route as a last option.