Most investors treat taxes as something to worry about in April. They file, they pay, forget about it and then they get back to doing deals. Taxes are an afterthought, not the forethought, but the best investors I know think about taxes year-round. Tax strategies help guide their funding decisions — and nowhere is that more powerful than in how you use your retirement accounts.
The IRS Already Gave You a Framework
Congress designed retirement accounts to encourage savings. The contract is simple: you get tax deferral (Traditional IRA) or tax-free growth (Roth IRA), in exchange for leaving the money alone until retirement. But what most people don’t realize is that the investment options extend well beyond what Wall Street offers. With a self-directed IRA (SDIRA), you can invest in what you know — including real estate. You get to leverage your knowledge.
That means the property down the street, the private loan to a local rehabber, or even a share in a commercial partnership could all be held inside your IRA.
Why Real Estate Fits So Well
Real estate has always been attractive to investors for its tangible value, cash flow, and appreciation. Inside an IRA, those returns compound tax-advantaged. Rental income flows back to the IRA tax-deferred. Profits from a sale can be reinvested without immediate tax. And if you’re using a Roth, qualified distributions down the road could be completely tax-free.
For investors who already spend their weekends at REIA meetings or walking properties, this is a natural fit.
Key Pitfalls to Avoid
Of course, the IRS didn’t create this system without guardrails. A few of the most important to know:
- Prohibited Transactions: You can’t personally benefit from your IRA investments today. No living in the property, no fixing the roof yourself, no renting to your son or daughter.
- Disqualified Persons: Your IRA can transact with strangers, but not with you, your spouse, parents, kids, or their spouses. There are a few others on this list so check with a professional.
- UBIT/UDFI: If your IRA borrows money or invests in certain operating businesses, it may owe unrelated business income tax. The rate is higher than personal rates, so model your deals accordingly.
Best Practices to Protect Yourself
If you want to keep the IRS happy and your deals profitable, here are a few habits worth building:
- Keep clean records. Every check in and out of your IRA should be documented. If you’re lending, record the mortgage. If you’re investing in an LLC, keep the operating agreement on file.
- Use third parties. Have property managers, contractors, and closing agents handle transactions. This avoids even the appearance of self-dealing.
- Ask questions before you act. A five-minute call with your CPA is cheaper than fixing a mistake after the fact.
Bringing It Home
Real estate investors are very resourceful. They know how to find deals, structure partnerships, and make properties cash flow. The missing piece for many is funding. Self-directed IRAs are one of the cleanest ways to bridge that gap, with the added bonus of powerful tax benefits.
The difference between average and excellent investors often comes down to mastering the tax side. If you can understand not just how to make money, but how to keep more of it, you’ll always have an edge.