Why You Shouldn't Buy Real Estate in Your IRA

Welcome everyone to the Directed IRA Podcast. This is Matt Sorenson, 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. Well, we want to talk about it.

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 do the same one in the same.

Let's break it down. Okay. Well, I'm going to just 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 what kind of their—

Yeah. 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. 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 'cause 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 gonna put in the IRA? What is the asset I'm gonna buy that's gonna 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 gonna have better cash flow and appreciation, than the mutual fund or target date 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 and a half.

I like your point, Matt, that I just gave you what the toe-the-line answer is for these promoters of real estate that say why you 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 going to pay the mortgage for you. 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 going to pay tax when I sell it. So to be so tunnel vision minded or whatever you'd say, to be so close-minded to think that the only reason you're buying real estate is for depreciation is ridiculous. And 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? So now we're going to unpack this more, but I think those are just the obvious issues that I see right on the face of it.

Yeah. And I think this— the next piece of this is, well, and I want to kind of beat up this tax by lose depreciation. Okay. This is the big thing. And I've even heard Robert Kiyosaki say it, others say it, you know, well, I love depreciation. 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 question. A lot of times they're not even getting it anyway.

Yeah, they, 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, 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 get 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.

Yep. So here, my friends, is the big reveal, because just in, what, 4 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 Poor Dad group— and I've met Robert, I've— we've had dinner together, we've played Gone Gambling together.

He spoke at your event.

Yeah, he came to an event. I love Robert, he's awesome. Yeah, but why in the world would his crew—

Smart people can disagree.

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 Dad Poor Dad 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 Sorenson. That's the problem.

Yeah. And I think, you know, and this is not again, the Robert Kiyosaki, 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. Robert Helms is part of his group that we have to— we've done a lot with. And those guys are like very smart on real estate. 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 at Directed. My largest investor, our largest account, has a $400 million plus Roth IRA. The primary asset he does is real estate. Now, it has a couple of 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 generally. You love it, you know it, you seem 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, 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.

Yeah. And see, our whole goal is to hold you captive, make you pay for our big workshop in Vegas in 2 weeks where we actually teach you how to buy real estate with your IRA. And we're gonna make you pay us thousands and thousands of dollars to understand how to do it. 'Cause see, really we're trying to take advantage of you. That's why We're arguing against the big dogs, you know, the influencers. 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 Sorenson 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?

October. October. Yep, 22nd, 23rd.

Yep, altassetsummit.com, where we talk not only about real estate, but there are 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.

Yeah, now let me say who shouldn't buy real estate with your IRA though, 'cause I do want to answer that. Ooh, who? 'Cause there are people who shouldn't buy it. It's not about the tax stuff. That's a secondary, tertiary, that is not the primary consideration here. You should not be buying real estate in your IRA.

My brother-in-law.

I 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, 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?

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 be buying real estate in an IRA or not? Or even in your own life? And so there, 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 skillset and the wherewithal, but they don't have the time. Or maybe they have the time and money, but they haven't learned the skillset yet. There's, there's kind of a trifecta that has to come together for you to, 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. 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 going to be right for me in my life?

Yeah, love it. All right, 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 IRA Podcast? If we're going to like put it to bed anywhere, why not do it here? Yeah, on the podcast.

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