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Updated over 6 years ago on . Most recent reply

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Phong Lam
  • Real Estate Agent
  • Philadelphia, PA
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Can Self-Directed ROTH IRA purchase R.E. with tax-free?

Phong Lam
  • Real Estate Agent
  • Philadelphia, PA
Posted

Hello BP Community,

How are you? Hope all is well! I'm a fairly new member on the BiggerPockets.

I just have a question for you regarding how to use a ROTH IRA funds to purchase real estate properties. Since all funds and capital gains are all growing tax-free inside of a ROTH IRA account. My questions are:

1.) IF we used ROTH IRA funds to buy a real estate property. Let's say if we purchased it for $100K and we held onto that property for 20 years and it grows to like $500K. Since we initiated the sale with using ROTH IRA funds to fund the deal, would the $400K capital gains be tax-free if we choose to sell it when we hit the legal retirement age?

2.) With the above example, IF we used $30K from ROTH IRA account to fund a $100K deal to pay for the 20% down plus closing costs, and we use the investment property as a rental, would all the rental income be considered TAX-FREE when we collect the monthly rentals? Not sure if the ROTH IRA tax-free funds being used to purchase the rental property will flow down to the rental income being collected each month.

Those are my 2 main questions regarding funding from ROTH IRA to purchase real estate properties.

Thank you very much in advance for your time! 

Best Regards,

Phong

Most Popular Reply

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Dmitriy Fomichenko
#1 New Member Introductions Contributor
  • Solo 401k Expert
  • Anaheim Hills, CA
6,240
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Dmitriy Fomichenko
#1 New Member Introductions Contributor
  • Solo 401k Expert
  • Anaheim Hills, CA
Replied

@Phong Lam, congratulations on your first forum post!

Roth IRA is tax-deferred vehicle. When you sell investment inside of a tax-deferred vehicle you are not taxed. Distributions from Roth IRA come out tax free (if you meet the criteria, which you are based on your scenario).

Since you are using leverage inside of an IRA, some of the income will be considered Unrelated Business Taxable Income (UBTI) and therefore will be subject to UBIT (Unrelated Business Income Tax).

As a real estate agent you are considered to be self-employed, therefore qualify for truly self-directed Solo 401k plan. It has number of advantages over self-directed IRA, such as being exempt from UBIT on leveraged real estate and large contribution limits that are 10 times higher than an IRA. You should consider this vehicle instead, although if you have funds in existing Roth IRA you would not be able to transfer those into Solo 401k.

  • Dmitriy Fomichenko
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