Yes, you can use your IRA funds to buy real estate investment property. But there are at least two things to consider before you do.
- You won’t benefit from a depreciation deduction. One of the great advantages of real estate investment comes from the tax savings related to depreciation (a paper loss referred to as passive loss by the IRS). Real estate investors investing through IRAs aren’t granted these passive losses from depreciation.
- You won’t benefit from the capital gains tax. Profit made on real estate investment property held for more than one year benefits from the 15% capital gains tax allowed by the IRS. Real estate investing through IRAs, however, loses the capital gains benefit and profits get taxed at the the marginal income tax.
Obviously both characteristics of using an IRA to fund a real estate investment are worth considering before you invest. And it is strongly recommended that you first consult with your tax advisor.
