A lot of people lessen the importance taxes have on
real estate profits due to the reduced tax rate given
to long-term capital gains, but that is only part of the
story. If you purchase and sell a property within a
twelve-month time period, you will have to pay taxes
on profits at levels as high as 35%. Ouch - 35% of your
return on investment could disappear!
What can you do to eliminate this tax burden?
How about making your investments inside a taxexempt
trust? In particular, a trust that most of us
refer to as an Individual Retirement Account, or IRA.
The most common misconception about IRAs is that
they are just a different type of brokerage account,
limited to investments in stocks, mutual funds, bonds,
annuities, etc. That is simply not true. By definition,
an "individual retirement account means a trust created
or organized in the United States for the exclusive
benefit of an individual or his beneficiaries." My
intention is not to bore you with IRS codes or technical
jargon, but to leave you with a clear and simple
message. An IRA is merely a trust that, when created
properly, can be used to accumulate wealth for retirement.
Let's walk through a simple example: You have
$150,000 inside your IRA account, and you're sick and
tired of losing money in the stock market. You decide
to open a self-directed IRA and choose to have your IRA
invest in a land deal in Coolidge, Arizona. Eight
months go by and you find a buyer for your parcel for
$225,000. Your IRA sells the property and creates a
$75,000 profit on the investment.
How much do you have to pay Uncle Sam in taxes on
the $75,000 profit within your account? Zero, zilch,
You also do not have to worry about doing a 1031 exchange
since your IRA is already a tax-exempt entity.
Exciting? I tend to think so.
The above example provides a very basic understanding
of the power and flexibility your IRA account can have
if it is truly self-directed. In future articles, we will be
delving into all the fine details, as well as other examples
on how you can begin to self-direct your future by
making investments in real estate!
(The above article was adapted from an article written by
J.P. Dahdah, President of Entrust Arizona)