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October 14, 2004

Comparing a Self Directed IRA and a Section 1031 Exchange

#1031 Insights

Many investors have discovered Self Directed IRA's in owning and investing in real estate. There are many similarities and some striking differences that make investment in real estate even more attractive where all sales are conducted as Section 1031 Tax Deferred Exchanges.

Individual Retirement Accounts.
  • If the real estate investments are considered to be a trade or business or are debt financed the investment earnings and gains are taxable annually.
  • IRAs limit the amount that may be contributed to the account each year. Expenses associated with the IRA account are generally not deductible or their deduction is limited.
  • Upon reaching age 70 ½, the IRA must begin to liquidate the IRA account and distribute the account balance which is taxed as ordinary income.
  • An IRA account balance is subject to income taxes and estate taxes at the time of the taxpayer's death. For many prosperous taxpayers, this cumulative tax can consume in excess of 65% or more of the account balance.
Investment Real Estate not held in an IRA.
  • Generally, the rental income may be offset by business expenses including mortgage interest.
  • The investor may reduce taxable income by depreciation.
  • Gains from the sale of the investment real estate may be tax deferred in a Section 1031 Exchange.
  • An investor is not limited by the amount that can be invested in real estate.
  • Losses from real estate are generally deductible by investors by tax election attached to their return.
  • Real Estate Investors are never required to liquidate their investment and take the proceeds into income.

We are ready to assist you in planning a tax deferred exchange of real estate and business property, including airplanes, equipment and artwork.

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