Real Estate in Retirement Account

[user43423]

I know it's possible to purchase real estate as an investment from a Roth or 401k, though it may be a little tricky. I'm only 27, but have a healthy balance in my retirement accounts and am interested in getting into real estate. I would ultimately like to buy a place that I then rent out to generate some cash flow, and ideally would like to do it out of a retirement account. Has anyone here had any experience and/or luck with such a setup?

[SaintM]

I've never heard of an employer offering real estate through a 401k plan.

You can buy real estate with a self-directed IRA, but I have no idea why one would.  When done right, owning rental property outside an IRA provides low-tax or tax-free cash flow by allowing you to deduct interest, taxes, expenses, and depreciation.  You can avoid capital gains upon sale of rental property by (1) moving into the place for two years ($500k if MFJ), or (2) conducting a 1031 exchange to another property.

[arebelspy]

To me the hands off restrictions that the IRS puts in place makes it not worth it on a rental within retirement accounts. I would absolutely invest in real estate, however, but it would likely be through notes.

[waltworks]

Does occupying for 2 years really get rid of the depreciation recapture? I did not think that was the case.

-W

I've never heard of an employer offering real estate through a 401k plan.

You can buy real estate with a self-directed IRA, but I have no idea why one would.  When done right, owning rental property outside an IRA provides low-tax or tax-free cash flow by allowing you to deduct interest, taxes, expenses, and depreciation.  You can avoid capital gains upon sale of rental property by (1) moving into the place for two years ($500k if MFJ), or (2) conducting a 1031 exchange to another property.

[SaintM]

Does occupying for 2 years really get rid of the depreciation recapture? I did not think that was the case.

-W

I've never heard of an employer offering real estate through a 401k plan.

You can buy real estate with a self-directed IRA, but I have no idea why one would.  When done right, owning rental property outside an IRA provides low-tax or tax-free cash flow by allowing you to deduct interest, taxes, expenses, and depreciation.  You can avoid capital gains upon sale of rental property by (1) moving into the place for two years ($500k if MFJ), or (2) conducting a 1031 exchange to another property.

From Publication 523, Selling Your Home:

How your sale qualifies.   Your sale qualifies for exclusion of $250,000 gain ($500,000 if married filing jointly) if the following is true:

- You owned the home and used it as your main home during at least 2 of the last 5 years before the date of sale.

- You did not acquire the home through a like-kind exchange (also known as a 1031 exchange), during the past 5 years.

- You did not claim any exclusion for the sale of a home that occurred during a 2-year period ending on the date of the sale of the home, the gain from which you now want to exclude.

Unless you held the property for a very long time or bought a hot market at the bottom, chances are your "gain" will largely be the result of depreciation recapture.  Meet these three rules and you can claim the exclusion.  The easiest way is to move back in for two years.

[waltworks]

I am aware of all that, but it's not clear to me that unpaid depreciation is something that counts as a "gain" for the purposes of this exclusion.

-W

[FabricStache]

I know it's possible to purchase real estate as an investment from a Roth or 401k, though it may be a little tricky. I'm only 27, but have a healthy balance in my retirement accounts and am interested in getting into real estate. I would ultimately like to buy a place that I then rent out to generate some cash flow, and ideally would like to do it out of a retirement account. Has anyone here had any experience and/or luck with such a setup?

I've heard of people doing it in a self-directed IRA.  There are a handful of companies that do this type of business.  I don't know the logistics but you might also want to post on the Bigger Pockets forum, if you haven't already.  That forum is specifically for real estate.  They had a portion of a podcast on real estate invested within a self-directed IRA.  I can't remember the show number but you can search their site.

[waltworks]

Cathy, you are awesome.

-W

[Another Reader]

The rules changed some time back, but few people seem to understand them.  A simple explanation that will keep people from making expensive mistakes would make a good post to pin at the beginning of this forum section.  In lieu of that, Michael Kitces wrote an excellent article explaining how the new rules work, with examples.

https://www.kitces.com/blog/limits-to-converting-rental-property-into-a-primary-residence-to-plan-for-irc-section-121-capital-gains-exclusion/