2016 Investment Tips: Tax-deductible Profits: Invest IRA or 401K in Real Estate

By Clarence Walker, NewsBlaze Business Writer

Editor’s Note: Hard-working American Taxpayers need to know that there are benefits from using their own Individual Retirement Account(IRA) or 401(K) plan to invest in Real Estate and other Property. With an IRA or 401(K) checkbook, investors can not only reap the profits, they can also earn and enjoy tax-deferred status on Real Estate investments.

Although IRA/401(K) Real Estate Investments are not a new business venture, this income-generating private business is one of today’s most profitable financial strategies for American retirees, according to the experts in this area.

So if you ever wanted to own Expensive Real Estate, but had no upfront money; but instead had an IRA or 401K pension fund, you can get into the market. If you want to earn profits from either IRA or 401(K) property investments … and pay little or no taxes on your returns … please read on …

2016 Investment Tips

During America’s hard hitting recession between 2007-2009, John Webber (not his real name) finally had enough dealing with high risk, unpredictable stock market business. Acting on a tip, Mr. Webber withdrew his funds from the “rumble and tumble” stock market, and transferred his IRA (Individual Retirement Account) into a Roth IRA. Armed with a unique, foolproof money-making strategy, Webber invested his IRA into a real estate/property investment plan, a plan that quickly materialize into a safer business option, an option that represented a great opportunity to maximize his profits from passive income earned from IRA real estate/property investing.

“It was the best decision made for my retirement funds,” Webber said.

Among top investments, IRA or 401(K) pension funds are long-term saving accounts that offer legal tax advantages, and all IRA/401 investors are rewarded with tax-deferred status on income earned from this type of investment.

“You don’t need good credit to invest in real estate with IRA or 401(K) money,” said Nate Hare in an interview with NewsBlaze. Nate Hare is the Executive Vice President of Quest IRA, based in Houston Texas.

Self-directed IRA or 401(K) funds are always sufficient for real estate investment purposes.

“All IRAs’ are self-directed. It’s up to the custodian as to what assets they will hold,” said Sandra Reese, in a recent U.S. News World Report. Reese is founder of Sandra Reese Enterprise LLC. Reese also serve as a self-directed IRA consultant.

Under IRA/401(K) provisions, investors use their pension funds to buy property such as a house, apartment complex or townhome and in return the investor rents the property to a tenant. But IRA/401 rules forbid the investor to live in or on the property purchased strictly for investment purposes.

greg mcbride
Bankrate Chief Financial Analyst Greg McBride

“Positive cash flow is key,” Greg McBride told NewsBlaze. “You”ll need to price the rent to account for unexpected expenses and repairs that inevitably “Pop Up.” “It is planning for these contingencies that will help you stay cash-flow positive,” McBride said during the interview. McBride is a senior Vice President and Chief Financial Analyst for Bankrate.com

“The IRA and 401(K) are both very valuable tools, and both can be used to purchase real estate as an investment, yet they are very different in the way they are administered,” IRA expert Nate Hare told NewsBlaze.

IRA Investment/Legal Background

More than 40 years ago in the U.S., a person was unable to use an IRA or 401(K) plan to purchase real estate or other property. What made it possible, though, was the passage of the 1974 Employee Retirement Income Service Act (ERISA). IRAs have primarily been self-directed due to the leeway allowed for investors to direct the custodian of the account to modify investments regardless of whether investments were stocks, bonds, mutual funds etc.

The ERISA law is limited to defining which type of investments are not allowed for purchase by someone using an IRA.

“You cannot use an IRA account to purchase things like coins, a life insurance policy, mutual funds or property that you reside in,” Nate Hare, told NewsBlaze.

Author Mark P. Cussen provides in-depth guidelines in this link by highlighting the items that investors cannot hold in an IRA fund.

Under legal statute, All IRA money invested for purchasing real estate must have a custodian to hold the assets for the IRA owner. A custodian can also serve as the IRA administrator responsible for handling daily operations.

Difference Between IRA and 401(K)

As noted in this article, most IRAs used for real estate investments are either self-directed or a traditional IRA can be used also, as can a preferable solo 401(K) fund. A Roth-type IRA is widely accepted but investors must realize this kind of IRA can work a bit differently “when it comes to distributions,” said expert Nate. Hare, during the interview.

10 Things to Know About Roth IRAs’ And 401K Plans

Nate Hare Explains the Inner-Workings of A Roth IRA

nate hare
Nate Hare.

“Roth IRAs work very differently since there is a specific order in which distributions are taken,” Hare told NewsBlaze. “The first funds removed are contributions followed by conversions,” Hare further explained. “When funds are put into a Roth IRA the funds are considered (after taxes) contributions. So whenever you remove those funds they are completely tax free and penalty free at any time.”

Hare explains another key point.

“Once the Roth IRA has been open/funded for at least five tax years, and the IRA owner is about the age of 59.5 years, then all funds in that Roth IRA become tax free and penalty free for the lifetime of the IRA owner.”

401(K) Investment

Expert Nate Hare explains that a “solo 401(K) is typically a product best suited for people who are good at keeping their own records and book keeping, since the funds is administered by the 401(K) owner. When it come down to people making a choice they sometimes opt to use the IRA method due to the 401(K) requiring more labor to maintain the account.”

“However,” Hare says, “the solo 401(K) has benefits.”

Here are some rules offered by expert Hare:

  1. Checkbook Control: The owner/trustee holds the checkbook and write the checks for the investments. This can be useful for investors who need quick access to retirement funds when buying property at auctions, quick closing etc.
  2. The Ability to Loan Yourself Money: (up to $50,000 or 50% percent of the value of the 401(K).
  3. Exception to Unregulated Debt Financed Income Tax: This is only beneficial to those who buy debt leveraged property as an investment strategy.

Expert Hare cautioned, “Despite the advantages there are some qualifying criteria to establish a solo 401(K).”

“First you must be self-employed, and secondly, you must legitimize the 401 by making a first year’s worth of contributions.”

A traditional 401(K) used for real estate investment works similar to an IRA except for slight differences in contributions and how the tax plans are structured.

Here are different types of retirement plans eligible for Self-Directed IRA/401(K) Accounts

  • Traditional IRA/401K
  • Roth IRA/401K
  • Simple IRA

How to Invest Your IRA or 401(K) Plan to Purchase Real Estate

According to real estate investment experts, first, you locate a property or even a property note.

Since your funds are part of a self-directed IRA plan, you may not always need to grab a property list to choose from. Keep in mind, it’s up to you to bear the load, take each risk, and in return receive the benefits.

Consider these rules when you are ready to purchase:

  1. Let’s say you purchase a retirement home and you’re not quite ready to retire from your 9-to-5; experts suggest, you should use your IRA or 401(K) to first buy the property, rent it to a tenant while you’re still employed. The benefit here is the income earned from a home or apartment rental payments are tax deferred until you make withdrawals. Therefore earned income from a particular property can be put away until retirement.

    According to IRA/401(K) expert Nate Hare, “when a person is ready, use an IRA or 401(K) to turn it over back to yourself as a distribution at current market value.”

    “When property is rented, the tenant is effectively paying the mortgage, including the principal,” Bankrate expert Greg McBride told NewsBlaze.

  2. Mixing Numbers: Assume you purchase a residential rental property worth $200,000 and the rent is $1500 per month. IRA consultants suggest you use your IRA checkbook or 401(K) checkbook plan to buy the property. Next, rent it out, then deposit the rent income into your Scheduled E, which amounts to a one-time annual report for the IRA, and further, there are no requirements for a 401(K) if the value of purchased property is under $250,000 – primarily because the rent is considered as a return on IRA/401(K) investment.

    And here’s another benefit; the profits earned don’t show up as taxable income on your tax return.

  3. Assume you find a great deal on a purchased rental and you sell it and are able to reap double or triple profits – remember all profits are considered as a return on investment under management of the 401(K) or IRA provisions.
  4. Commercial Property: For example, If you find a net-lease commercial property for $2,800,000 – and the cost for expenses and operating the property add up to approximately $300,000 per year, simply use your IRA checkbook or 401(K) checkbook to buy the property or land tract. And when you decide to sell, again, all profits are considered as a return on investments under IRA/ 401(K) provisions.
  5. Other Type of Real Estate Allowed For Purchase With IRA/401 Pension Fund:
    • Net Lease Commercial
    • Single Family Homes
    • Office Building
    • Townhomes/Condos
    • Vacation Rentals
    • Beach Houses
    • Land
    • Industrial/Warehouses
    • Multi-family Complexes.
  6. Additional Facts to Know
    • You or the administrator can legally manage a property or properties, but under IRA provisions the investor cannot live in or on the property.
    • Restrictions may apply when leasing property to a relative. There are no restrictions for other tenants.
    • This may sound a bit redundant, but it is important: any profits made off rental property must return to your IRA checkbook or 401(K) checkbook account.
    • Any gains from a property sale must be remitted to your IRA checkbook or 401(K) checkbook.
    • Bottom Line: capital gains are also designated as a return on investment. As stated earlier there are no Scheduled (E) attached to IRA/401(K) capital gains – which means the rental funds earned off property investment is not required to be reported on tax returns.


Keep in mind that a wise investor should first consult with a financial advisor or IRA/401(K) consultant to decide which kind of IRA/401(K) is best suited for their choice and circumstances to invest in real estate. When you have valuable assistance, your financial future can grow brighter. Proper advice and thorough preparation can propel people interested in these kind of investment strategies to own expensive real estate that once seemed impossible to own.

For more information on IRA/401(K) real estate investing just start by clicking this link

Clarence Walker
As an analyst and researcher for the PI industry and a business consultant, Clarence Walker is a veteran writer, crime reporter and investigative journalist. He began his writing career with New York-based True Crime Magazines in Houston Texas in 1983, publishing more than 300 feature stories. He wrote for the Houston Chronicle (This Week Neighborhood News and Op-Eds) including freelancing for Houston Forward Times.Working as a paralegal for a reputable law firm, he wrote for National Law Journal, a publication devoted to legal issues and major court decisions. As a journalist writing for internet publishers, Walker's work can be found at American Mafia.com, Gangster Inc., Drug War Chronicle, Drug War101 and Alternet.His latest expansion is to News Break.Six of Walker's crime articles were re-published into a paperback series published by Pinnacle Books. One book titled: Crimes Of The Rich And Famous, edited by Rose Mandelsburg, garnered considerable favorable ratings. Gale Publisher also re-published a story into its paperback series that he wrote about the Mob: Is the Mafia Still a Force in America?Meanwhile this dedicated journalist wrote criminal justice issues and crime pieces for John Walsh's America's Most Wanted Crime Magazine, a companion to Walsh blockbuster AMW show. If not working PI cases and providing business intelligence to business owners, Walker operates a writing service for clients, then serves as a crime historian guest for the Houston-based Channel 11TV show called the "Cold Case Murder Series" hosted by reporter Jeff McShan.At NewsBlaze, Clarence Walker expands his writing abilities to include politics, human interest and world events.Clarence Walker can be reached at: [email protected]