And Save Money On Taxes

It’s April and most of us are too familiar with what that means.  Taxes are due.

I don’t mind paying my fair share.  But I don’t want to pay more than my fair share.

Many of us ask questions like:

How can I pay less in taxes?

How can I build my nest egg faster?

How can I get the best return with my retirement funds?

And a few of us may be drawing funds from our retirement accounts.  

Then we might ask more questions.

How can we get an increasing stream of cash flow?

Many people don’t even realize that it is possible to own real estate in a retirement account.

Some people think that real estate should only be owned outside of a retirement account because some tax benefits are lost when the real estate is in a retirement account.  But that ignores the question, “How can I get the best return with my retirement funds?”.


In 2009 I decided that I wanted to use some of my retirement funds to invest in real estate.  The dot-com crash had wreaked havoc on the stock market and my 401(k) several years earlier.  I also recognized that there were buying opportunities in real estate.

My wife and I did not have a lot of cash to invest in real estate at the time.  But I did have an IRA with funds that came from a 401(k) account.

I was already attending meetings at the local Real Estate Investors Association, Georgia REIA.  There were lots of classes and regular meetings on specific topics, but nothing that addressed IRAs.  So I started a subgroup to learn about investing in real estate with IRAs.

Every month we had a guest speaker.  I was not an expert, but I could find someone every month who would come in and talk with us about some aspect of retirement accounts.

The first month we had a local IRA custodian.  In the following months we had a national speaker who lived locally, attorneys, and accountants.

I also attended seminars and read books about investing with my IRA.

In time I purchased a house with my IRA.  It was rehabbed and flipped using a contractor and Realtor.  Note that all work was done by contractors.    And all proceeds went to the IRA.

I purchased another house and it became a rental. The property was managed by a management company.  Every month the management company sends a check to my IRA account.

Later there was an opportunity to become a lender with a smaller amount of funds.  The loan was secured.  Every month the borrower sends a check to my IRA account.

Now that we are eligible to withdraw retirement funds, we are able to take something out every month.

We like to call these regular checks “mailbox money.”  Because they keep coming in to our mailbox.


As you are probably aware, there are many ways to make money in real estate.  They all work.  With a retirement account we need to keep our hands clean.  That means no self-dealing and we cannot perform any work on the property ourselves.

I’ll keep this list simple and focus on passive investments.  Retirement accounts are not intended to be active businesses.  Engaging in an active business can subject the retirement account to Unrelated Business Income Tax.  Flipping houses can easily fall into this category when it is done on a regular basis.

So let’s look at three ways to passively invest in real estate using retirement funds.  Keep in mind that these funds might come from an IRA, old 401(k), solo-401(k), medical savings account, or my favorite, a Roth solo-401(k).


Becoming a lender is one of the easiest ways to put retirement account funds to work.  Think about how much a bank will lend on a home purchase.  This is typically up to 70-80 percent for conventional mortgages.  There is a reason the banks limit the loan to 80-percent.  There is typically enough equity left in the property to get their money back if they have to foreclose.

Many house flippers like to use money from private lenders because they can be faster and easier to deal with than a bank.  The interest rate and term are negotiated between the parties.

Other investors like to use the BRRRR strategy and private lenders.  BRRRR stands for Buy, Rehab, Rent, Refinance, and Repeat.  The investor Buys the house with funds from a private lender, frequently from a retirement account, then Rehabs the house, Rents it out, then Refinances the loan with a long-term mortgage and Repeats the process.

Not all IRA custodians are willing to let you use your funds in this manner.  It takes a custodian who is willing to let you truly self-direct and choose your investments, not merely select an investment from a list of options.

Since all of the funds came from a retirement account, all of the loan payments go directly back to the retirement account.


Another strategy is to buy a property to hold as a rental.  Let’s start with a single family house as there are many to choose from and there is a ready market for renters.

We like to buy houses that need work because they can be purchased at a discount.

Funds for the purchase come from the retirement account

Remember that you are not allowed to personally do any work to the property.  That could be considered a contribution by the IRS.

Next we get the house rehabbed and ready to rent using contractors.

Contractors are then paid from the retirement account.

Use a property manager to find a suitable tenant and get the house rented.  Note that the property manager may also be able to coordinate the contractors needed for the rehab.  

While it is permissible to self-manage a property that is held in a retirement account, it is best to keep yourself distanced as much as possible.  By having a property manager it is easier to demonstrate a clear division between you and the person who is doing the work.  

Rents that are received via the property manager go directly into the retirement account.  Note that the property manager’s fee will be deducted before you receive the funds.

Owning a property free and clear in an IRA can be a good source of income.  Net rental income can become a stream of mailbox money.


A third option to invest passively with retirement funds is to buy a share of a partnership.  

Some partnerships are done simply as Limited Liability Companies, or LLCs.  Others are partnerships formed as syndications under SEC regulations and also utilize an LLC structure.  I am referring to the syndication partnerships.  

Syndications are a form of limited partnerships and offer certain protections.

First, they have general and limited partners.  The general partners are the syndicators.  They should not invest with IRA funds because they should not be seen as providing a material or personal contribution.  

On the other hand, limited partners can contribute with retirement funds.  These partners will not provide any personal services to the investment.  The private placement memorandum, or PPM, specifically states roles of the different classes of ownership.  Liability of the limited partners is generally limited to the amount of their investment.

Most syndications use leverage to purchase or hold the investment.  The loan to value is frequently 60-80 percent of the value of the underlying asset.  The loan is non-recourse to the limited partners.  It is typically non-recourse to the general partners, as well.


Now that we understand it is possible to get better returns in a retirement account, let’s explore two ways to turn a good thing into a great investment.

The return on investment may be increased by using leverage.  Any financing obtained within an IRA account needs to be non-recourse to the account holder.  This means the IRA account owner cannot extend credit or be personally liable for the loan.

One drawback to buying property with leverage in an IRA is paying taxes.  Taxes must be paid on Unrelated Debt Financed Income, or UDFI.  These taxes are levied against the leveraged portion of the investment.  So if the property has a loan to value of 40-percent, then 40-percent of the net income would be subject to UDFI tax.

The good news is that if the property is held for long-term investment, over a year, then the tax rate is lower.

On the other hand, 401(k) accounts are not subject to UDFI tax.  These funds can be leveraged without having an additional tax liability.  This is one benefit of solo-401(k) accounts.

The other factor that really boosts after tax return is using a Roth account.  Not all employers offer Roth versions of their retirement accounts.  

If the investment is held in a Roth IRA, then all gains are tax-free.  Unless the property is leveraged.  In that case, UDFI tax still applies.

If the investment is held in a Roth 401(k), then all gains are tax free.  Even if the property is leveraged.

You can read more about the benefits of Roth accounts in this blog, To Roth Or Not To Roth?.


There are many ways to invest passively in real estate, and some are suitable for retirement accounts.  Lending, buying rentals, and investing in private-placement syndications are three ways to passively invest with retirement funds.  Roth and 401(k) accounts offer additional advantages to making a good thing even better.


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Through the power of a syndication partnership with other investors like you, working with managing partners who are experienced in managing apartment complexes, you can own multifamily assets.  

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