Never Pay Taxes on Your Investment Property Income Again – The Self-Directed Roth IRA

A very savvy real estate investor and friend, Ramesh Chandra (mepcigroup@gmail.com),  

shared with me a little-known way to avoid paying any tax on your real estate investment income. 

The tax laws allow you to purchase real estate investment property in a self-directed Roth IRA.  This is a little known fact because most brokerage firms offering Roth IRAs limit  what you can invest in to equities, bonds, mutual funds, etfs and other traditional financial instruments. 

You can find brokerage firms, though, that will permit you to buy the other assets that the tax laws allow.  (One of the most well known is Equity Trust - http://www.trustetc.com/).  These include real estate investment property, notes, partnership interests, some collectibles, etc. 

There are several benefits.  Since you have put in post-tax money to your Roth IRA, any additional income you make off your investment property will never be taxed again.  The rental income will never be taxed and the appreciation will never be taxed.  You can’t take the money out for personal use of course before retirement age but quite often you want to hold investment property until retirement age anyway. 

Then you don’t have to worry about doing a 1031 exchange when you sell the investment property because there are no capital gains taxes. 

This is a complicated area so we’ll do our next post on the downsides of investing this way and some of the rules you have to be wary of when you make this move.