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Rental Property Investing with IRAs
By: Barry Waxller
An individual retirement account is familiar to most when it is referred to by its abbreviation IRA. What most people are not familiar with, however, are the strategies you can use to crank up your return on investment.
The idea of buying a home through an individual retirement account may seem out of sorts. It is not. Most people incorrectly assume they can only invest in mutual funds, stocks or bonds.
Investing in the stock or bond market with your IRA is an in the box strategy. You can make a decent return, but is that really what you want? I doubt it. Leveraging your IRA account to buy homes and condos has much more potential.
Using your IRA to buy homes and such might sound like an aggressive idea that might raise the ire of the IRS. In truth, it is not and the IRS has said as much. The language allowing it is right in the tax code, to wit, this is not a loophole strategy.
Truth be told, you have the right to invest your retirement dollars in many more investment areas then you are led to believe. So, why haven’t you been told this? Well, most stock investment brokers don’t make money in real estate, so why would they promote it?
The nuts and bolts of the strategy are fairly simple, but the devil is in the details. In general, you open a self-directed IRA and use that vehicle to invest in property entities. Get it right and you can make a bundle. Get it wrong and it is a nightmare, so do this with professional help.
This form of IRA can be held both as a traditional or Roth IRA. The structure, however, is a bit different. There is an independent custodian overseeing the account. It is required by law to make sure people don’t crazy with investments. The custodian is not expensive.
Whenever dealing with the IRS, it is important to understand there are always some limitations. They are usually so complex that you get a headache trying to read them. In this case, they are not.
You cannot buy property from yourself or family members. That is it. Doing so would be considered self-dealing, which is a no-no in the tax world. The prohibition applies even if you buy the property at fair market value.
The actual fundamentals of the buying process are a bit convoluted. You do not actually purchase property. The custodian of the IRA will do the purchasing. The IRA then reaps the gains in rents or appreciation.
While buying property with an IRA is a good strategy, doing so with a Roth IRA is a much better one. It works the same way, but the tax benefits are tremendous. All distributions made from the Roth with be tax free. It is a nice way to build your retirement nest egg.
The above represents a very simplified look at maximizing your IRA investment with property. That being said, it is one of the outside of the box wealth building strategies that can produce tremendous returns.
Article Source: http://www.ezarticles.info
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