Can I really avoid capital gains tax with a self-directed IRA?

[Ronald Stanley]

Hey family,

I purchased a rental property in 2016 under my own name for $135,000. The home is now worth $225,000 and I plan to sell it in the next six months.

My plan is to use the profit to pay off the mortgage on my primary residence. I was advised that there are tax savings when selling a home that's owned by a self-directed IRA. Is it true that I can avoid or limit capital gains taxes? If so, how is this done? I have some money in a traditional 401(k) and My wife has a little bit of money in an old 401(k) from a company she no longer works for. We are thinking about rolling her funds into a self-directed IRA.  Is it too late to incur the tax savings since I bought the home in my name or is there a way that I can put the rental home into a self-directed IRA before I sell it? Any advice would be greatly appreciated. The rental home has a mortgage balance of $111,000 if that plays a role in your answer. I expect my capital gains taxes to be north of $30,000 from the sale but I'm not really sure how to calculate what it will end up being.

[Dmitriy Fomichenko]

Originally posted by @Ronald Stanley:

Originally posted by @Dmitriy Fomichenko:

@Ronald Stanley,

IRA is tax-deferred vehicle and there would be no capital gain tax on a sale of an investment property. If the property is financed in a self-directed IRA - there would be Unrelated Business Income Tax on the profit from leveraged portion of the property (truly self-directed Solo 401k plan would be exempt from taxes on leveraged real estate).

There is no possible way for you to transfer existing property you own personally into your IRA! Also you can't combine your IRA with your wife's - each of you will need a separate IRA.

Thanks Dmitriy. Lets say that I convert my wife's old 401k into a SDIRA and I use it to purchase a property in the future. When I sell the property and make a profit I understand I wont have to pay a capital gains tax but I may have to pay an unrelated business income tax. The rest of the profit would be distributed to me correct? Or does all of the profit have to go back into the Self Directed IRA. In other words I want to be able to use the profits now.

All profit from investments owned by the IRA belongs to the IRA. You can take distribution from your IRA at any time subject to taxes (and penalties for premature distribution).