If you’re extremely knowledgeable about real estate, you might believe this is an excellent time to buy investment property. Prices have fallen in recent years so good buys may be available. Real estate even might make sense in your IRA but tread carefully. Here’s a basic distinction:
Property ownership. Some IRA custodians will let you hold property. However, inside your IRA, the tax advantages of real estate are lost. You can’t take depreciation deductions, you can’t deduct any losses, and you can’t use favorable long-term capital gains tax rates on a profitable sale. In addition, complications are likely to arise if you get a mortgage loan to buy property in your IRA.
Real estate-related debt. Your IRA can lend money to a borrower who’ll use the proceeds for a real estate venture, just as your IRA is allowed to lend money to a corporation by buying its bonds. For safety, you might invest in a Ginnie Mae mutual fund and step into the shoes of mortgage lenders. Ginnie Mae mortgage-backed securities have federal backing and some Ginnie Mae funds have returned 6% per year, even during the recent upsurge in home mortgage defaults.
Other real estate plays offer higher returns, if you’re willing to take risks in your IRA. They include second mortgage loans, participating mortgages, and tax lien certificates. Again, a background in real estate investing will help your chances of finding profitable opportunities.
