Depreciation of Real Estate IRA Assets

Question: If I purchase property with non-IRA funds, I can write off depreciation. I can’t if I buy it with my IRA. Why should I give up what appears to be such a significant tax advantage? 

It’s true that you may give up the depreciation tax advantage by investing in real estate with a tax-advantaged plan. You do so, however, in exchange for a different and possibly better tax benefit.

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If you buy property with personal funds, you can expense a portion of the cost over the allowed time period (usually 27 1/2 to 39 years). Depreciation expense, which doesn’t require current cash, lowers your taxable income.

IRA-purchased real estate is different and carries its own significant tax advantage. Traditional IRA contributions are tax deductible, thus there is no basis for an individual to deduct. Money made in a Roth IRA, though not deducted when contributed, is tax free for the future. Either case is better than having to depreciate the property over 27 years or more.

The majority of our clients already have money in their retirement plans either from their personal contributions or their employer’s contributions. They are already enjoying the benefits of the tax-deferred or tax-free money. The only way they could use those funds to purchase real estate personally would be to take it out of the plan, giving up its special tax status and, in the case of Traditional IRAs, incur income taxes.

Comparing post-tax money in your pocket to pre-tax or tax-deferred money in your retirement plan is not comparing apples to apples. Since the tax-advantaged money in the plan is not yours until you withdraw it, the goal is to grow the retirement balance. How will you grow your IRA?

Some investors will search for property that is likely to appreciate in value. Our clients have invested their self-directed IRAs in land they anticipated would grow in value in the future, while others bought property to rent out and generate a steady income. Like all investments, due diligence is required to decide what will work best for your account and its investments.

Let NDTCO Help

NDTCO can help with the administration of your account. Give us a call at 877-742-1270 or send us a message through the Client Portal if you need assistance or have any questions.

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