The IRS has always permitted an IRA to purchase or hold real estate or raw land. With a Self-Directed IRA Real Estate, you will be able to purchase raw land, domestic or foreign real estate, residential or commercial property and much more tax-free and without requiring custodian consent!
There are a number of advantages of using retirement funds to purchase real estate.
Firstly, since an IRA does not pay tax on generally all of the income and profits it receives (pursuant to Internal Revenue Code Section 408), using a Self Directed IRA to buy real estate allows for the tax deferral of all gains. For example, For example, if you made a real estate investment with your Self-Directed Real Estate IRA for $55,000 and later sold the property for $100,000, the $45,000 of gain would generally be tax-free. Whereas, if you purchased the property using personal funds (non-retirement funds), the gain would be subject to federal income taxes and in most cases state income tax. In addition, if the IRA real estate investment generated income (i.e. rental income), all income would flow back to the IRA tax-free!
Secondly, purchasing real estate with a Self Directed IRA or Real Estate IRA will allow you to diversify your retirement portfolio so you are not overexposed to wall Street. Thirdly, using a Self Directed IRA to purchase real estate, may allow you to make a real estate investment you may have not been able to make personally due to a lack of funds.
Although, most people believe that purchasing real estate in a Self Directed IRA Real Estate structure makes a lot of sense from a tax and financial standpoint, the one drawback of using retirement funds is that once can not benefit from the use of any deductions or losses. If a real estate investment is made using personal funds, then one would be able to avail themselves of the ability to use deductions, depreciation, and even losses to reduce ones income tax liability. Whereas in the case of a Self Directed IRA, since an IRA is tax-exempt the IRA would not be able to use any of the deductions or losses generated by the investment project. Most tax practitioners give little weight to this argument since paying no tax is generally believed to be far more tax advantageous then being able to take deductions.
With a Self Directed IRA Real Estate or Real Estate IRA, you are the manager of your Self-Directed IRA LLC giving you have the authority to make real estate investment decisions on behalf of your IRA. The real estate investment would be in the name of the Self Directed IRA LLC. Al income, gains, and losses generated by the real estate investment would flow back to the real estate IRA LLC tax-free.