​I won’t invest in rental property in my Self-Directed IRA!

[Chuck VanDyne]

I won't invest in rental property in my Self-Directed IRA!

Yes, I said it! In most cases, it isn't advantageous to invest in rental property in with my Self-Directed IRA. Since there are a number of prohibited transactions and disqualified members it is a lot more difficult to maximize my return on investment.

With a SDIRA, I have to obtain a non-recourse loan which can mean a 35%-50% down payment. According to the IRS, I cannot manage the property myself, I cannot conduct any repairs myself, I cannot find my own tenants, I can’t even have my parents, spouse, children, or grandchildren do anything related to the property. It seems that unless you have a large amount of cash in your SDIRA and planned on having other people manage the property entirely then it isn't worth using your SDIRA.

In my case, I did not have a ton of money to start investing so it was hard to justify paying a 40% down payment for a single family home when I could just get a loan with a 15% down payment from MB Financial in Rochester NY with my personal money. I could also save myself 10% a year on property management, $1000 for tenant placement, and other expenses I would have paid not doing repairs myself.

I have found that the best method for investing in real estate in your SDIRA is when you are flipping properties. I can flip 10 houses a year and not pay capital gains tax on any of the proceeds until I withdraw it. I can even have checkbook access to the SDIRA so i can readily pay contractors to perform improvements. If I converted to a Self-Directed Roth IRA then I wouldn't have to pay capital gains tax at all! I would only have to pay taxes at the point of converting it to a Roth IRA.

I believe the tax advantages for investing in rental properties in my SDIRA are minimal considering my rental property already have a lot of tax deductions. At the end of the year the only money I pay taxes on is principal, capital improvements, and net income. I write off depreciation, depreciation on capital improvements, repairs/maintenance, interest payments, property management (my LLC manages), insurance, taxes, garbage removal, and utilities. After all my deductions I am left with a small amount of taxable income and certainly not enough to justify paying a larger down payment and extra expenses.

How do you guys feel? Am I missing something? Anybody flip properties in their SDIRA?