Why You Shouldn't Buy Real Estate in Your IRA

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In this episode of the Directed IRA Podcast, Mat Sorensen and Mark J. Kohler take on one of the most common misconceptions surrounding self-directed retirement accounts. They break down why many financial influencers discourage investing in real estate through an IRA, examine the role depreciation actually plays in real estate investing, and explain why maximizing long-term, tax-advantaged growth should be the primary objective.

The conversation explores when real estate does and doesn't make sense inside an IRA, the advantages of using a Roth IRA for real estate investments, and why your investment strategy should be based on your knowledge, experience, and long-term retirement goals rather than common myths. Whether you're considering your first investment property or looking to diversify your retirement portfolio, this episode provides practical insights to help you make a more informed decision.

Download our Beginner's Guide: Investing in Real Estate with Your IRA - https://directedira.com/beginners-guide-investing-in-real-estate-with-your-ira/

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For questions or to learn more about this episode's topic, book a call with an IRA specialist here: https://directedira.com/appointment/

Other:

Mat Sorensen: https://matsorensen.com

Mark J. Kohler: https://markjkohler.com/ 

KKOS: https://kkoslawyers.com

Main Street Business https://mainstreetbusiness.com

Transcript

The Controversy In One Question

SPEAKER_01 0:08

Welcome everyone to the Directed IRA podcast. This is Matt Sorensen joined by the incredible Mark J. Kohler. And we've got a controversial topic today about using an IRA to buy real estate. And a lot of people say, you shouldn't do this. Don't use your IRA to buy real estate. No, we want to talk about it.

SPEAKER_00 0:27

Yeah. Oh, I thought we were just going to answer the question, but we're going to actually talk about it. Okay. All right. We can't the same. One and the same. Can you break it down?

The Depreciation Argument Explained

SPEAKER_00 0:35

Okay. Well, I'm going to just uh say, tell you what their number one reason is first that they state out loud. Then I'll tell you the real reason why they say this. The reason that they give all of you is to not why not to buy real estate in your IRA is because you do not get to take the depreciation deduction. And for some reason, the only reason in the world you would buy real estate is so you can get depreciation write-offs. Not to consider it might actually be a great return. You might actually make good cash flow. It might at the end of the day be a great return on investment. Doesn't matter. It's that you cannot take the depreciation, which is apparently the only reason you're buying real estate anyway. So don't do it in your IRA. That's dumb. Bye. That's their mainline answer. Would you agree, Matt? That's a kind of their Yeah.

SPEAKER_01 1:26

And yeah, this is coming from Mark J. Kohler, tax attorney, CPA. I'm also a tax lawyer. Guys, we know this. I like depreciation. I can see the benefits to it. I buy real estate outside of my IRA. All right. But let's and let's focus on the first part.

The Real Goal Of An IRA

SPEAKER_01 1:43

And Mark made the key point there. And there's really two sides to this. The first part is why am I buying real estate with my IRA? Well, I'm buying real estate with my IRA because at the end of the day, when I hit 59 and a half, I want that IRA to have the most value in it possible. What's the investment vehicle that I'm going to put in the IRA? What is the asset I'm going to buy that's going to get my account as large as possible? If you think it's the mutual fund you've been in for the last 10, 15, 20 years, fine, buy more of that. If you think the real estate is going to have better cash flow and appreciation than the mutual fund or target aid fund or whatever it is you're doing, then you should be buying that. We want you to buy the best asset that's going to have the best growth and drive the most value so you have a retirement account that's big enough that you're actually looking forward to when you hit 59.5.

SPEAKER_00 2:32

I like your point, Matt, that I just gave you what the toe-the-line answer is for these promoters of real estate that um say why you don't shouldn't do it in your IRA. But I like the flip side of that. I don't care what it is, you want to get the best return in your IRA so that it grows as big as possible. That right, everybody? The second question I don't think is talked about enough is why are you buying real estate in the first place? Well, it's for a variety of reasons. There's multiple reasons why you buy real estate. Matt and I've been teaching this for years. Whether it's in your IRA or not, there's several factors: appreciation, cash flow, mortgage reduction. Some tenant's gonna pay the mortgage for you, um, diversification, and maybe there's some tax benefits. Oh, you mean the tax benefit that when I sell that real estate, there's a good chance I'll pay no tax at all because I did it in my IRA? Screw the fact I need to get depreciation, I'm not even gonna pay tax when I sell it. So to be so tunnel vision-minded or whatever you'd say, so to be so um closed-minded to think that the only reason you're buying real estate is for depreciation, it's ridiculous. And and then then you put that on the plate when Matt says, Well, don't you want to get the best return you can for your IRA? I uh so now we're gonna unpack this more, but I think those are just the obvious issues that I see right on the face of it.

Why Depreciation Often Doesn’t Matter

SPEAKER_01 4:11

Yeah, and I think this the next piece to this is well, the and I want to kind of beat up this tax by lose depreciation. Okay, this is the big thing. And I've already heard Robert Kiyosaki say it, others say it, you know, well, I love depreciation. Oh, okay. The majority of our clients at directed IRA don't get to do much with the depreciation on rental properties they own personally. They're not a real estate professional. That depreciation loss they get is getting stuck over with their other investment rental properties. It's not offsetting their income. That's a good point. A lot of times they're not even getting their own right. Yeah, they can it gets bottled up over there and it's carrying forward. I like that. I can use it later if I own it personally, but it's not helping me now. So so now I get if you're Robert Kiyosaki, then sure, he's a real estate professional for tax purposes, I presume, because it's primarily what he does. So I assume. So he gets to use his real estate losses to offset any other income he's got, his book, or whatever. And he loves that. But most people don't get that. It's getting bottled up in the rent in the rental property. And here's the other, here's probably my biggest point on this depreciation issue is is actually your IRA can take depreciation. It just has nothing to do with it. Because depreciation can only offset income. You don't have income that's taxable in your IRA. And if it's a Roth IRA, it's coming out totally tax-free. What am I supposed to do with the depreciation? You just can't use it because you're in a world where you don't pay tax. So do you want to live in a world where you pay tax and you're going to use this depreciation sometimes to offset the income? Or do you just want to live in a world in this account structure like the Roth IRA, our number one account at directed IRA, where you never pay tax period?

SPEAKER_00 5:57

So here, my friends, is the big reveal.

The Hidden Reason Influencers Dismiss IRAs

SPEAKER_00 6:01

Because just in what, four minutes, we've I think our logic is pretty sound. And many of you listening are like, yeah, that makes freaking sense. Then why in the world would Robert Kiyosaki and Rich Dad Portad group, and I've met Robert, we've had dinner together, we played, we've gone gambling together and he's a good one. Yeah, he came to an event. I love Robert, he's awesome. Yeah. Um but why in the world would his. Yeah. Why would they say this then? If it's that obvious and the logic is so sound, what's the real reason they say it? It's because it's too complicated and they don't know how to teach their followers to buy it in their IRA. And we don't want to do the heavy lift. It creates more friction. And a potential buyer of real estate, if we go down this path, we will lose them. They will not buy real estate through our organization or group. And so, and I'm not saying this is just Rich Deboretta or whatever. I'm just, these influencers that say don't do it, is because they don't know how to do it. And by going down that path, it creates friction. They don't want friction. They want their people to just go, oh, you're so smart. You're right. Where do I send my check? I'll just buy it in my own name, when, like Matt just said, half the time they don't get the depreciation anyway. But this is why they don't say to do it, because they don't have the solution. They don't have the book, the self-directed IRA handbook, third edition, at their desk. They don't know what to do. They don't have Matt Swordson. That's the problem.

SPEAKER_01 7:47

Yeah. And I think, you know, and this is not, again, the Robert Keys like we love him. I thought his book is like probably one of the best top 10 business books of our generation. I mean, Rich Dad Poor Dad. Um, Robert Helms is part of his group that we have done, we've done a lot with. And those guys are like very smart on real estate. Um, we just think on the IRA side, sometimes it's got a little blown out of proportion of, well, you don't get to take the depreciation. I'm like, oh, who cares? I don't, I'd rather pay no tax anyways. I mean, I get a zero tax bill on my Roth account, which is the number one account we do it directly. My largest investor, our largest accounter, has a $400 million plus Roth IRA. The primary asset he does is real estate. Now it has a couple, these real estate deals might have a couple more zeros behind it than the typical client we have. But the point is the same. He's investing in what he knows. He's using a tax-free vehicle, the Roth IRA, to compound and generate more money that he gets to keep. And I think that's the same process everyone who's doing real estate in general. You love it, you know it, you've seen to do better at that than in other assets. And there are some tax benefits, some perks to it that let you keep more of it and build more wealth with it than other types of assets that might be taxed more heavily. But I'm just saying the Roth account in particular, which is the most popular account that we do, we can use asset real estate to invest in it and build and grow it in a better tax outcome than personally, where you get depreciation.

SPEAKER_00 9:14

Yeah. And see, our whole goal is to hold you captive, make you pay for our big workshop in Vegas in two weeks, where we actually teach you how to buy real estate with your IRA. And we're going to make you pay us thousands and thousands of dollars to understand how to do it. Because, see, really, we're trying to take advantage of you. That's why we're arguing against the big dogs, you know, the influencers. Uh, wrong. Do you know how many podcasts that you can go right now to in our history? And we have explanations from A to Z of how to buy real estate in your IRA. We have webinars every month, free webinars on our website with examples and testimonials and stories on how to buy real estate in your IRA. Matt Swanson has an entire chapter in his book on how to buy real estate in your IRA. People, we love this topic. Our next big event, the Alt Asset Summit, is in Orange County in October or November, Matt?

SPEAKER_01 10:11

October.

SPEAKER_00 10:11

Yep. 22nd, 23rd. Yep. Altassetsummit.com, where we talk not only about real estate, but our other alternative assets. And we try to make it easy and simple and affordable. So I hope you know you're in the right place. And this logic is that's making sense to you is just that. You can invest in what you know, you can get the best rate of return. Real estate can oftentimes do a 20% return or more before even depreciation is brought into the situation. So I hope that you're finding this to be an answer of clarity and confidence for you and your investing.

Who Should Not Use An IRA

SPEAKER_01 10:50

Yeah. Now let me say who shouldn't buy real estate with your IRA, though, because I do want to answer that. Ooh, because there are people who shouldn't buy it. It's not about the tax stuff. That's a secondary, tertiary. That is a that is not the primary consideration here. You should not be buying real estate in your IRA. My brother in law. You believe in real estate. You don't know real estate. You're Mark's brother-in-law. Okay. And it's not for everyone. Just like buying real estate personally is not for everyone. But you know what? More people become millionaires buying real estate than any other asset class. It's tried and true. It's literally not going anywhere. The only way you really lose money on it is if you get upside down in the debt because real estate has proven time and time again for centuries to be a successful way to grow and build wealth. And we like it and have seen clients have success with it because they want to take control, they want to be more involved, they're entrepreneurial, they know their market, they know the specific asset class within real estate to be successful and they get really good at it. They can drive better returns by being involved and investing what they know and believe in than they can just letting Wall Street have it in a mutual fund. They don't even know what the hell is going on with it. So it depends on who you are. And I'll be honest, not everyone is this is for. I'm not saying this is for everybody. So I don't want to talk you into it, but if you know real estate, you love real estate, you've had success at it, why not use a tax-free vehicle like a Roth IRA to grow and build wealth in it?

SPEAKER_00 12:17

I I I like your reframe. Our primary conversation today is about should real estate be in an IRA or shouldn't it? I think we put that to rest. The secondary question is should you find real estate in an IRA or not? Or even in your own life. And so uh there uh and it's maybe a lot of times I think there's a third question. Is it that time in your life where you should? Because a lot of times people have the skill set um and the wherewithal, but they don't have the time. Or maybe they have the time and money, but they haven't learned the skill set yet. There's there's kind of a trifecta that has to come together for you to pull the trigger on real estate. Then you can ask, should it be in my IRA or not? Then you can make a more informed decision. Um, and I so I don't want anybody to beat themselves up and feel guilty for not buying real estate in their IRA or individually, but to just sit back and ask questions and be curious. When is that time gonna be right for me in my life? Yeah.

SPEAKER_01 13:29

Love it. All right.

Final Takeaways And Listener Requests

SPEAKER_01 13:31

Well, thank you everybody for hearing our rant and hearing us out on this. We thought we had to address it. I get that question often, and we do see it out there on social media. So we want to put it to rest here. Why not on the Directed RA podcast? If we're gonna like put it to bed anywhere, why not do it here? Yeah.

SPEAKER_00 13:45

On the Directed RA podcast. Totally. Thanks everybody for listening. If you found this to be helpful, please share it with someone in your circle of friends or family that are investors. And give us a five-star, two thumbs up, 10 out of 10, whatever the case may be. Please follow, like, subscribe, punch the bag, whatever it takes. We would love to be uh have you as a regular listener. Thanks so much for listening today, and we'll see you next week for another episode of the Direct and IRA podcast.