IRA Retirement Account InvestmentFor those who invest in real estate, the best vehicle for maximizing the profit potential of any transaction is a retirement account, such as a 401(k) or individual retirement account (IRA). By utilizing the funds in a retirement account to collect income from rental real estate or buy and sell real estate, substantial tax benefits will be realized by the investor.

This will transpire if the property is flipped, held for long term capital gains, or serves as an investment to generate rental income that increases well into the future.

A major appeal of a retirement account for real estate is that the profits realized from selling properties and the income received are both tax free. If you flip a house and sell it in less than a year, then there could be short term capital gains taxes as high as 25 percent. But if the property were bought and sold in an individual retirement account, the profits are tax free…no matter high times you flip!

The same tax treatment applies for the rental income received from real estate held within an individual retirement. Passive income such as that generated by rental real estate can be very heavily taxed at every level. Even states with no income tax such as New Hampshire tax rental income. If the property is part of an individual retirement account, the rental income is tax free, though.

In addition to the tax free income and capital gains, the money that goes to fund the individual retirement account is deducted dollar-for-dollar from an individual’s income. That results in tremendous tax savings. As detailed in “Save Big,” a recent article on retirement planning in Forbes by Ashlea Ebeling, “…A 52-year-old entrepreneur netting $300,000 could use a one-person defined-benefit pension plan combined with a 401(k) to shelter a total of $169,800 from current income taxes…”

Real estate InvestingWhat real estate also offers, whether inside a retirement account or not, is that it is the only asset that pays for itself. The rental income from a property can easily pay for the mortgage and operating expenses, if chosen wisely. While rent varies depending upon where the property is located, it increases generally around 4% on a historic basis. That means that rental income doubles every 18 years, based on the traditional trajectory of rent increases.(1)

There are also tax breaks for actively managed rental real estate that are not found with other investments. The costs of finding investment real estate are tax deductible. So are any expenses for courses, training, or accounting. Real estate is one of the best investments for generating a vast array of deductions that can do much to both lower your taxes and increase your profits.

Real estate in a retirement account also provides a fail safe level of risk management. There can be no mortgage for real estate held in a retirement account. That is an effective hedge for preventing a property from being foreclosed upon if adverse economic conditions develop.
For both generating gains and preventing debilitating losses, buying real estate for a retirement account is superior way to profit with tremendous tax advantages for all investors.

by, Jonathan Yates: EquityBuild News Contributor

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