Tax Free Real Estate Purchases Climb

By Mike Colpitts

Boosted by lower real estate prices and growing volatility in financial markets, investors are increasing their purchases of tax free real money tree estate investments. Investors are moving away from investing in equities in the stock market and other financials in growing numbers due to a chorus of concerns, including insider trading, automatic machine trading and criminal conduct.

Retired investors are shopping for higher returns and wider diversification to protect their assets from losses. The Investment Retirement Account (IRA) solo 401-K plan is an IRS approved retirement program created for self-employed investors.

Tax attorneys have seen a large increase in the number of self-employed investors purchasing property through IRA’s in the last year. “The beauty of the solo 401-K plan is that it allows one to defer up to $49,000 annually for retirement while gaining the ability to make real estate and other investments tax-free,” said Scott Krokoff, a tax attorney at IRA Financial Group, a New York based firm.

“A self-directed IRA allows you to buy tangible assets such as real estate inside of your IRA and receive the profits tax-free,” according to Joe Allen, an investment real estate broker with ReMax Results in Minneapolis, Minnesota. “This investment approach gives you full control over your investments and is not subject to the ups and downs of the stock market.”

An IRA allows investors to unlock funds held in a retirement account to purchase real estate to generate monthly income, which then can be used to pay for retirement without reducing the account balance.

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“Compare this to owning stock in your retirement account,” said Allen. “To fund your retirement you must sell off stock each year to provide funds to withdraw. With real estate, you are not forced to sell your assets for retirement income because your tenants will be providing this monthly income now and in the future.”

Depending upon the type of real estate purchased and region of the country, real estate investments may still produce 7 to 15% annual net returns, according to brokers. Unlike stocks or other financial investments, investing in real estate also provides a tangible asset that can be sold in case of an emergency or redirection of assets.

The trustee of the 401-K plan retains control over retirement funds to make real estate and other investments tax-free.

When it comes to making investments using retirement funds, the Internal Revenue Service code doesn’t define exactly what types of real estate may be purchased with proceeds from an IRA, only what cannot be purchased.

Internal Revenue Code Sections 408 and 4975 prohibit Disqualified Persons from engaging in certain types of transactions. The purpose of the rules is to encourage the use of qualified retirement plans for the accumulation of retirement savings and to prohibit those in control from taking advantage of the tax benefits for their personal account.