Real Estate 401k - 401k And Ira

Real Estate 401K Investment

Is it possible for a person to finance their purchase of real estate property using a 401k retirement plan? Although there are many things to be considered certainly real estate 401k investment is something that may be a person should look at in serious terms.

Unfortunately today there are many banks and brokerage companies which will limit a person as to where they can actually invest their 401k funds. They will normally restrict a person investing their retirement funds in either certificates of deposit, mutual funds, annuities, stocks or other similar kinds of investments. But now section 408 of the Internal Revenue Code allows people to use their qualified plan or IRA to own just about any sort of real estate possible. It is up to you whether you invest directly into property or indirectly through real estate investment trusts. But the disadvantage to the latter is that the overheads associated with these trusts can be extremely high and therefore extremely prohibitive to many people.

Plus you do need to be careful when investing in real estate using a 401k or IRA retirement plan as you will find that there is a special tax on any debt financed income. This is often referred to as an unrelated business income tax and so if the real estate you are buying is mortgaged you will then need to file with the IRS Form 990-T. This form allocates the income a person has earned between their debt and non debt finances and so will tell you what tax is due. So, say for example, you decided to purchase a property that was worth $100,000 and you then paid $70,000 and borrowed the rest against your 401k. At that point you be entitled to shelter 70% of the income you earned from that property from being taxed while the rest, based on the amount borrowed from your 401K, would be subject to normal rates of income tax.

Certainly if you are looking for a way of not having to pay any income tax at all on real estate investments you make then you need to purchase it as an all cash transaction. But should you not have sufficient funds available of your own to make an all cash purchase then you can use your 401k retirement plan to purchase a partial interest in the property. Such a real estate 401k investment is more commonly referred to as a tenant in common interest transaction.

Bookmark the Site Now!