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How to Invest in Real Estate Completely TAX-FREE

November 2, 2021

Using Self-Directed retirement accounts (IRAs, 401ks, etc.) to invest in real estate comes with tax benefits that you would not experience making the investment outside of one. If you’ve been in the game long enough, you understand that no matter how well structured a deal is or how profitable your fix-and-flip or investment property was, nothing stings like paying the IRS their share of your hard work.

Some people think that Capital Gains Tax is a necessary evil, but I would argue that those same people just don’t know what they don’t know.

So how does a real estate investor eliminate Capital Gains tax? Are you thinking of 1031 Exchanges? Notice that I said eliminate, not just defer.

Yes, a 1031 Exchange can defer Capital Gains tax and put you in a position to only pay long-term capital gains tax rather than short-term, but what if I told you that there is a way to completely ELIMINATE Capital Gains tax, altogether?

No 45-Day Rule, no 180-Day Rule, no “like-kind” provisions, and (most importantly) no day of reckoning where you’ll still have to cut a check to Uncle Sam, paying Capital Gains tax and ultimately suffocating your growth potential.

You might start by buying your real estate in a Self-Directed Traditional IRA. Yes, you’d be in a position where Capital Gains tax doesn’t apply, but you would still be required to pay income tax at the time you take distributions.

Am I hinting that you can eliminate Capital Gains tax AND income tax as well?

If I didn’t, I would be doing you and countless other real estate investors a life-changing disservice.

Both types of IRAs (Traditional and Roth) eliminate Capital Gains tax, but they each have very important and very different treatment regarding taxation on distributions and growth.

  1. Traditional IRA
    1. Advantage = Tax-deductible contributions and tax-deferred growth
    1. Disadvantage = Distributions are taxed as ordinary income, including ALL contributions and ALL investment growth.
  2. Roth IRA
    1. Advantage = Qualified distributions are completely TAX-FREE, including ALL contributions and investment growth
    1. Disadvantage = Contributions are not tax-deductible

Distributions are typically “qualified” when the Roth IRA holder is age 59 ½ or older and the Roth has been opened for 5 years.

It is up to you (the tax-savvy investor) to decide if tax-deductible contributions (Traditional IRA) are worth more to you than completely tax-free investment growth (Roth IRA).

But imagine the power of a Roth IRA invested in cash-flowing real estate:

  • The ability to live TAX-FREE from qualified distributions paid by renters
  • Appreciation in property value while it pays you in tax-free qualified distributions
  • You will NEVER be forced to liquidate your assets to satisfy Required Minimum Distributions that would plague the same investments in a Traditional IRA.

With a Roth IRA, you can build your legacy tax-free and pass your cash-flowing investment properties to your beneficiaries, creating TRUE generational wealth with an Inherited Roth IRA.

Alex Sylvia, IRA Specialist