Is the real estate IRA advantageous?
No it is not. Real estate under-performs over time when compared to equity investments. Holding real estate in an IRA is also a complicated nightmare.
...and there are many landmines with prohibited transactions, like selling property to an IRA or having the IRA buy property that you would ever touch personally. You trip the wire, and all of a sudden your IRA ceases to exist and you're looking at a total distribution with loads of penalties on top of taxes. There are lots of scams out there related to real estate in an IRA. Not a good idea.
Besides under performing other investments you have problems with unrelated business income tax. This comes about if you use the real estate personally or you have debt to finance the purchase of the property. By placing the real estate in an IRA you will have converted capital gain into ordinary income. You will not be able to deduct any losses against your other income either as rental loss or a capital loss if you sell it. Unrelated business income is paid by exempt trusts and corporations on certain income. The tax is paid with form 990T and the tax rate is 35% federal and whatever rate your state charges.
The real estate IRA is generally not a good from a tax standpoint. Although you shelter your gains, you lose many of the tax advantages of owning income-producing real estate. Any expenses that you have in operating the property have to come out of your IRA, and you receive no tax deduction for these expenses inside the IRA. Any gains you have from selling property inside the IRA will be converted to ordinary gains when you take a distribution. You cannot use the capital gains tax rates which are lower.
