At 1031 Exchange Place, we understand the importance of understanding the tax implications for real estate investments held within an Individual Retirement Account (IRA). Rental income and capital gains from real estate investments within an IRA are treated differently than those outside an IRA for tax purposes.
When you hold a real estate investment within an IRA, the rental income generated from the property is not subject to immediate taxation. Instead, the income is treated as tax-deferred and is allowed to grow within the IRA. This means that the rental income is not taxed as it is earned, but rather, taxes are deferred until you begin taking distributions from the IRA. When you take a distribution, the amount withdrawn is treated as ordinary income and is taxed at your current ordinary income tax rate.
Similarly, capital gains from the sale of real estate within an IRA are also tax-deferred. This means that if you sell a property held within your IRA and realize a capital gain, you will not be subject to immediate capital gains tax. Instead, the gains will remain within the IRA, allowing them to continue growing tax-deferred. When you eventually take distributions from the IRA, the amount withdrawn, including any capital gains, will be treated as ordinary income and taxed at your current ordinary income tax rate.
It is important to note that these tax benefits are applicable to traditional IRAs. If you hold real estate investments within a Roth IRA, the rental income and capital gains may be tax-free, provided you meet the qualified distribution requirements, which include being at least 59 ½ years old and having held the Roth IRA for at least five years.
As always, we recommend consulting with a tax professional or financial advisor to fully understand your specific situation and the tax implications of your real estate investments within an IRA.