Asset Optimization Blog - Ken W. Stone
Is a Self Directed Retirement Account Best (part 3)?
In Retirement Planning by Ken Stone (September 19, 2008 11:35 pm)
It’s critically important to understand the Tax Consequences of the decision to purchase investment real estate with a self directed retirement account.
Here’s the scoop on the tax treatment for investment real estate at the time of sale (setting aside the tax benefits that are realized during ownership):
–>Gains as defined by the IRS are subject to long term capital gains.
–>Recapture tax is owned on the depreciation (whether taken or not – the IRS assumes you’ve depreciated your investment real estate so take the depreciation!).
–>Section 1031 of the code allows for a tax deferred exchange (both recapture and capital gains are deferred). There are strategies for avoiding the capital gains (without getting into estate planning approaches) – please see my DVD workshop and workbook for more details.
Here’s how tax deferred retirement are taxed on withdrawal:
–> As income – which is necessarily at a higher rate than long term capital gains. For more information about how marginal tax brackets work and retirement tax strategies, please see my DVD workshop and workbook for more details.
So why would you voluntarily move from a lower tax rate (long term capital gains) to a higher tax rate (taxed as income) by purchasing investment real estate inside a self directed retirement account rather than outside with non-retirement funds?
The answer: Respectfully, because you don’t have enough money to invest in real estate. And if that’s true, a self directed retirement account invested in real estate isn’t right for you!!
Tune in next time for the investor profile I think might make sense for a self directed retirement account investing in real estate.
To your optimized financial health,
Ken
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