Question for CPA about using IRA

[Kathy Patterson]

I am interested to know how using a tax-deferred retirement account to purchase a rental would affect my ability to use depreciation. On the surface, it seems that you would not be able to depreciate an asset in a tax sheltered account any more than you would be able to write off stocks that went down in value inside an IRA. Is this correct?

Also, when I eventually sell the property and am required to begin withdrawals at age 70 1/2, wouldn't my withdrawals be taxed as ordinary income vs being taxed as a more favorable long term gain outside my IRA?

Thank you,

Kathy

[Lance Lvovsky]

Both @Brian Eastman and @Dmitriy Fomichenko are correct. Having no depreciation benefit is an important consideration.

Most of my clients who want to use their IRA for something other than stocks will use the IRA to invest in notes, or make private loans to other investors. Given that under current tax law, interest income is taxed at ordinary income rates, it is a good idea to invest in notes in an IRA as this is a tax favorable strategy. On the other hand, generally clients continue their buy and hold investing outside of an IRA, to reap the benefits of depreciation.