Case Study: Investing with Tax Deeds in an IRA
This case study illustrates how one of Advanta IRA’s clients earned tax-sheltered retirement income by investing with tax deeds in an IRA.
Paul has used self-directed IRA for years to invest in alternative assets that increase the earning potential of his portfolio. He likes the freedom and control he has to choose his own investments instead of relying on a third party broker to make these critical choices for him. He enjoys learning about different alternative assets and is constantly on the lookout for a potential deal.
As a building contractor, Paul knows quite a bit about residential real estate. He is an expert in home renovations. He uses his self-directed account to invest in tax deeds. Because he has knowledge in the industry, he typically acquires investment property to rehab and flip for a profit. Paul understands that as the owner of the self-directed account, he is unable to personally perform any of the renovations and must hire someone else for that purpose. That’s okay with him because he has enough of his own work on his hands and he knows other contractors he can trust to work on his investment property. IRS rules require all renovations to be paid with his retirement plan funds, since the IRA owns the asset. Paul has plenty of funds in his account and always finds a tax deed at a good price that leaves enough capital in his account to pay for the rehabbing of the property.
The location of properties attached to tax deeds is critical to sell the property for a profit after the rehab. Because Paul is a building contractor, he is familiar with many different neighborhoods in his area. That knowledge has helped him to successfully invest in tax deeds and earn a substantial bit of tax-sheltered income in his retirement plan.
Here are two examples of his success:
- In mid-November of 2014, Paul purchased a tax deed for $6,800 using his IRA funds. He then spent $22,000 of his retirement funds to pay for renovations.
- In mid-June of 2016, he sold the rehabbed home for $50,870.
- His retirement plan made a profit of $22,070—tax-free.
- Again, in mid-November of 2014, Paul purchased a second tax deed with his IRA. This one cost $4,890. He used a total of $6,800 of his retirement funds to rehab the home
- In mid-May of 2015, the home sold for $18,000.
- His retirement plan made a profit of $6,310—again, tax-free.
These two investments garnered a total of $28,380 tax-free income in Paul’s self-directed IRA—in less than one year’s time. His success represents the intent and motivation of using self-directed retirement plans, which is to invest in what you know best. Paul uses his own knowledge and expertise to his advantage in achieving his retirement planning goals.