How to Invest in Real Estate with a Self-Directed IRA Phoenix AZ

Many investors have become disenchanted with recent stock market volatility, stories of corporate scandal and corruption. In addition to impacting retirement account values, these events have also strained investor confidence. It is no wonder then that more and more investors are pushing their advisers to offer Self-Directed IRAs (SDIRAs) that allow them to invest in alternative assets which they believe will provide greater diversification and control over their retirement nest eggs.

What You Should Consider

While the list of alternative investments includes a wide-ranging group of assets — including private equities, hedge funds and mortgages — one area that has captured the greatest level of interest is real estate.

Typically, real estate comprises 60% of clients’ alternative asset investments. Some real estate advisers suggest that falling prices, combined with increasing inventory, is creating new investment opportunities. As prices begin to fall, the pendulum may swing past center to create oversold conditions, providing opportunities to buy real estate at low prices. Some areas in the U.S. may already be starting to experience this phenomenon.

Another factor to consider is that many real estate investors are being squeezed out of the market due to the current credit crisis. This has created a unique opportunity for cash-rich retirement plan investors. These investors are either purchasing the real estate outright, through a partnership, or LLC. It is estimated that the first of more than 78 million baby boomers will begin to retire this year. This group controls more than $14 trillion dollars in retirement plan assets. These assets are being “rolled-over” from employer-based plans to individual retirement accounts. Many baby boomers have already begun to shift away from traditional equity investments to those that generate income, such as, income producing property. Add these factors with the possibility of equity appreciation, and it is clear why real estate is growing in popularity.

Opponents of using the SDIRA to invest in real estate focus on key concepts which they believe have a profound effect on individual financial strategies. Before engaging in any transaction prudent investors are wise to consider them. First, profits personally made in real estate, if long-term, are taxed at the capital gains rate of 15%. When a SDIRA sells a piece of real estate there are no taxes due at the time of sale. However, when the owner takes a distribution from their retirement account, the proceeds will either be taxed at their ordinary income rate (for a traditional SDIRA) or are tax-free under the Roth SDIRA.

Additionally, SDIRA investors cannot depreciate property or write off interest from their mortgage on their personal tax return. Another important issue concerns the access and use of property held inside the SDIRA. Neither the account holder nor his or her family members may have personal use of ...

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