Advantages of using a Self-Directed IRA LLC to purchase Real Estate
Income or gains generated by an IRA generate tax-deferred/tax-free profits. Using a Self-Directed IRA LLC to purchase real estate allows the IRA to earn tax-free income/gains and pay taxes at a future date (in the case of a Roth IRA the income/gains are always tax-free), rather than in the year the investment produces income.
With a Self-Directed IRA LLC, you can invest tax-free and not have to pay taxes right away or in the case of a Roth IRA-ever! All the income or gains from your real estate deals flow through to your IRA tax-free!
Why Buy Real Estate using a Self-Directed IRA LLC
- Gains are tax free
- Positive cash flow is tax free
- No time limit for holding property
- IRA can borrow money – Leverage your investment with non-recourse financing
Potential to earn a larger rate of return on invested capital
Tax Advantages of Buying Real Estate with a Self-Directed IRA LLC
When purchasing real estate with a Self-Directed IRA LLC, in general, all income and gains generated by your pre-tax retirement account investment would generally flow back into the retirement account tax-free. Instead of paying tax on the returns of a real estate investment, tax is paid only at a later date, leaving the real estate investment to grow unhindered. Generally, self-directed IRA real estate investments are usually made when a person is earning higher income and is taxed at a higher tax rate. Withdrawals are made from an investment account when a person is earning little or no income and is taxed at a lower rate.
For example, if Joe established a Self-Directed IRA LLC with $100,000 to purchase real estate and make other investments. Assume Joe kept his Self-Directed IRA LLC open for 20 years. Further assume that Joe was able to generate an average annual pre-tax rate of return of 8% and the average tax rate was 25%. By using a tax-deferred Self-Directed IRA LLC strategy, after 20 years Joe’s $100,000 investment would be worth $466,098 – a whopping $349,572 after taxes on the earnings. Whereas, if Joe made the investments with taxable funds (non-retirement funds) Joe would have only accumulated $320,714 after 20 years.
Types of Real Estate Investments
Below is a partial list of domestic or foreign real estate-related investments that you can make with a Self-Directed IRA LLC:
- Raw land
- Residential homes
- Commercial property
- Mobile homes
- Real estate notes
- Real estate purchase options
- Tax liens certificates
- Tax deeds