On this episode of Adam Talks, tax attorney and IRA Financial’s founder, Adam Bergman, Esq., explains why investing in real estate in an IRA is way better than owning it personally.
In this episode of “Adam Talks,” Adam Bergman, a tax attorney and founder of IRA Financial, argues that investing in real estate through a Self-Directed IRA is more tax-efficient than owning it personally. He intends to provide a detailed example to demonstrate the benefits of tax deferral and compounding returns that come with using a Self-Directed IRA for real estate investments, countering common arguments about depreciation and deductions.
Using a hypothetical scenario, Bergman explains how a client named Chris, who is 45 years old and in a 32% tax bracket, could utilize $250,000 from his $300,000 IRA to purchase real estate. Chris sets up a Self-Directed IRA with an LLC for limited liability and control. Over 20 years, the property generates $10,000 annually in rental income, all of which is tax-deferred within the IRA, amounting to $200,000 over the period. Additionally, the property appreciates at 5% annually, reaching a value of $663,000 after 20 years.
If Chris sells the property after 20 years, he gains $413,000 in appreciation, plus the $200,000 in rental income, totaling $613,000 in tax-deferred gains. Added to his initial investment, Chris would have $863,000 in his IRA without paying taxes. Bergman underscores that this scenario illustrates the power of tax deferral within a Self-Directed IRA, leading to significant long-term growth.
In contrast, if Chris used personal funds to purchase the property, the $10,000 annual rental income would be subject to a 32% tax, leaving him with only $6,800 per year, or $136,000 over 20 years. Upon selling the property, Chris would owe capital gains tax of 20% on the $413,000 appreciation, amounting to $82,600 in taxes, and reducing his total gain. As a result, Chris would end up with $466,400, significantly less than if he used his IRA.
Bergman acknowledges common counterarguments regarding the lack of deductions in an IRA, such as depreciation. However, he points out the limitations of passive activity loss rules and depreciation recapture taxes that can diminish the value of these deductions for personal ownership. Ultimately, Bergman asserts that the tax-free growth and lack of tax on income and gains make a Self-Directed IRA a superior choice for real estate investment.
Concluding the podcast, Bergman stresses that long-term investments like real estate align well with the benefits of an IRA, emphasizing the importance of tax-efficient growth and wealth accumulation. He encourages listeners to consider the compelling financial advantages of using retirement funds for real estate investments and invites feedback from his audience.
