IRA real estate investments are booming in 2008 for soon to be retirees who are worried about their future retirement plans. With the economy looking wobbly, the stock market plunging and the big investment banks going under, with us bailing them out, some traditional forms of retirement investing are starting to look a little sick.

For these reasons IRA real estate investments are increasing. Increasing? Surely not. Along with an economic meltdown, a stock market collapse and all sorts of economic turmoil, isn’t the real estate market headed for oblivion as well? Who in their right mind would consider investing their IRA in real estate?

Surely in 2008 real estate is a one way trip to the poorhouse.

No, not quite. Have you ever heard the expression that there is opportunity in adversity? There is plenty of opportunity in real estate right now, if you know where.

But lets look at IRA real estate investing first. How can you invest your IRA in real estate? Is it allowed? Is it legal?

Traditionally the majority of the population invest their IRAs in investments that are promoted to them by their custodian. In fact some custodians limit allowable investments to their own. So, it’s estimated, over 90%, in fact around 96% of IRA funds are invested this way. Mutual funds, CDs and stocks, and so on.

No problem if the markets are pushing ever skyward, but quite a problem right now.

But what about IRA real estate investments? Yes it’s entirely allowed to invest your IRA in real estate through a self directed IRA. Although this is not widely recognised, IRA real estate investing is one of the best forms of wealth accumulation for retirement. Real estate is a traditional long term wealth accumulation model, and as such is in fact ideal for IRA investing.

If you’re not certain about the details of how to set yourself up for IRA real estate investing consult your CPA, that’s outside the scope of this article. However take my word for it, it’s quite legal, and many canny IRA investors are doing it right now, and have been for a long time. You may need to execute an IRA rollover into a self directed IRA, but the trouble is worth it.

And there’s powerful reasons to consider investing your IRA in real estate. Did you know, for example, that it’s estimated that 85% of all wealth in the US was created through real estate?

And that through your IRA you can secure up to 70% bank non-recourse financing to invest your IRA retirement funds in income producing real estate?

Its food for thought isn’t it?

Now back to the real estate market. After all there’s no point in IRA real estate investing if the value of your real estate investment is going down is there?

Although we all hear that the real estate investment market is dreadful this isn’t the whole story. PARTS of the real estate market are dreadful, but not ALL of it. It’s perfectly possible to find excellent opportunities for investing in the lower priced end of the market. Simple comfortable homes for the working class who live in those faceless suburbs in cities right across America. There are some fantastic IRA real estate investments available in the right place RIGHT NOW.

But if you’re looking to get out there and find them yourself then you may be in for a shock. It’s not something that is realistic for the individual IRA real estate investor. You need professional help.

Buy in the wrong place and you’ll probably get burnt, big time.

But right now there are some excellent opportunities available for securing a great real estate investment, no cash down, at under market value, with tenants supplied, rental guarantees and even a guarantee that you will double your current investment return.

All through a major US public corporation with a reputation for solid real estate investment returns, for both IRA real estate investing and ordinary credit investing in real estate.

Yes you can secure your retirement future through a good IRA real estate investment, or more than one. However it’s the time to leave it to those who really know what they’re doing in hard times, and you can relax and leave the hard work to someone else.

But which corporation could possibly offer an opportunity like this?

One of the greatest tax deductions offered to landlords is depreciation expense. The IRS allows landlords to depreciate the improvement of a rental property (single family residence) over 27.5 years. So, if you purchase a rental property for $125,000 and the land is worth $25,000, you can deduct the $100,000 improvement ($125,000 – $25,000 = $100,000) over 27.5 years, or $3,636.36 per year.

Depreciation is an invisible expense. The depreciation expense is added to yearly property taxes, mortgage interest, insurance, property management fees, and repairs. Below is a year 1 sample mortgage analysis with purchase price of $125,000 and financing $100,000 at 7% with a 30 year note:

Principle payment            $84

Interest payment              $581

Property Taxes                $250

Insurance                        $50

Management fee              $50

Total Payment                 $1,015

Assuming a monthly rent of $1,000, you can deduct all above expenses except the $84 principle payment. Your total monthly deductions are $931 ($1,015 – $84 = $931). This calculates to a monthly gain of $69, or yearly gain of $828. Now apply yearly depreciation of $3,636, and your property shows a yearly loss of $2,808. Depreciation can be a very powerful tool once you start acquiring more properties. If you owned eight properties with this scenario, you could deduct $22,464 against ordinary income. The IRS allows landlords to write off up to $25,000 in rental property losses against ordinary income.

High paid wage earners are not able to fully take advantage of rental property losses.  The IRS limits the amount of losses you can deduct against ordinary income once your adjusted gross income (AGI) exceeds $100,000. AGI includes W2 wages, self employment income, interest, dividends, capital gains, and rental income before any Schedule A deductions or exemptions are considered. Once your AGI exceeds $100,000, the IRS multiplies the overage amount by 50% and reduces your loss by that amount. So, if your AGI is $110,000 and you have a passive loss of $5,000, you are not able to write off any losses against ordinary income ($10,000 x  50% = $5,000). Instead, you can only carry over the loss. With an AGI of $150,000, all deductions are phased out.

If you are a licensed real estate agent, charge a management fee, and use the rental property you own to generate business income, you can apply the yearly depreciation expense against your Schedule C business return instead of Schedule E. Once you deduct the depreciation as a business expense, the property usually shows a profit on Schedule E as shown in the example above. Because the property shows a gain on schedule E, you are able to bypass the IRS AGI calculation. Please check with your CPA for details. 

Taking advantage of depreciation and acquiring more rental property can drastically reduce your tax liability. The longer you own the property, the more profitable it becomes. Rents usually increase yearly in a good market. In a standard amortization schedule, the principle payment increases and the interest expenses decreases slightly each year. The longer you keep the property, the more it will cash flow over time.

Once the property cash flows a couple hundred dollars per month, the depreciation expense makes the cash flow profit tax free. Take the tax free cash flow dollars and apply those funds to your Schedule A deductions for interest and property taxes on the home you live in. This is double dipping. You are taking tax free dollars and then using those funds to reduce ordinary income. 

One final tip. Buy a property for each child when they are young. Rent the property out for 18 years. Once your child is ready for college, pull cash out with a line of credit or cash out refinance, and send your child to college for free. The interest is deductible; you pay no income taxes for the loan; and your tenant pays for the note and for your child’s college education. After you die, give the property to your children. The cost basis is the same as fair market value when they inherit the property. If they sell immediately, they pay no capital gains (assuming properties meet estate limits).