Self-Directed Real Estate IRA vs. 1031 Exchange


If you have a rental property in a self-directed IRA can you use a 1031 exchange to sell it?

First, let’s explain what a Self Directed Real Estate IRA and 1031 exchange is so you know the differences.

A Self Directed IRA is an IRA account that you directly control and direct into investments of your choosing. One of the most common investments that clients make inside their Self-Directed IRA is purchasing real estate.  Keep in mind that the Real Estate is sitting in an IRA account so any gains or losses are tax deferred until retirement age.

A 1031 exchange is a way to take appreciated property that gets sold and defers the capital gains on the sale of that property.  For a 1031 exchange to be legal, though, you need to abide by.

The rules:

  1.  A 1031 exchange is not necessary on your primary residence if you have lived there 2 of the last 5 years
  2. You must buy a link kind asset.  This means if you sell real estate you must rebuy real estate.
  3. Use a 1031 exchange mediator who can hold your cash from the sale of the property until you have found a replacement property
  4. You have 45 days to designate a replacement property.  You can designate up to 3 different properties
  5. Close on one of the three replacement properties within 6 months
  6. If you do not use all the profits on the purchase of another property you will be taxed on the difference.

The rules I have given above are general rules.  I would suggest consulting with a tax professional for more information on a 1031 exchange.

Now that we know what a Self-Directed IRA and 1031 Exchange are, we can discuss why a Self Directed Real Estate IRA is more beneficial than a 1031 exchange.

Some of the benefits

  1.  All gains from the sale of the real estate are tax-deferred or tax-free if you have a Roth IRA.  So you don’t have to worry about paying taxes until you retire.  You can use all the gain from the sale of the property to buy another property.  With a 1031 exchange, you must follow all the specific guidelines in order for your taxes to be deferred.
  2. When you sell the property you DO NOT need to buy a Like Kind Asset.  You can choose to buy gold or silver in your IRA if you wanted.  With a 1031 exchange, you are forced to buy another property.  You may want to get out of the real estate business and cannot with a 1031 exchange
  3. If you to buy another property after the first is sold, that’s allowed.  You don’t have to have found a replacement property within 45 days and close on the property within 6 months.  There is no time limit to rebuying property like there is with a 1031 exchange
  4. You can mix and match real estate with other investments in a self-directed IRA and all the profits are still tax-deferred.  This means that you can sell real estate for gain. Use a portion of the profits on another property and use the remaining funds on another investment such as gold and silver.  With a 1031 exchange, ALL the profits need to go to another property or you will be taxed on the part of the profits that don’t go to the purchase of another property.

In conclusion

A Self-Directed IRA is a great option for you if you are wanting to buy real estate inside of your IRA.  If you have any more questions or comments feel free to contact me or leave comments below.

Author: , Self Directed IRA Professional

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