Theory vs. Reality: Why IRA Investors Could Care Less About Loss of Depreciation Write-Offs
The internet is a great thing. Safeguard Advisors would not exist without the ability to market our very specialty services surrounding self-directed IRA and Solo 401(k) plans to a national audience. Even in a big city like Los Angeles or New York, we could not run a business based solely on self-directed retirement plans if we could only serve investors able to stop by our office.
Well, sometimes the internet also stinks. There is just too much information, not all of which is worth the bits used to store it. And that can be confusing.
A case in point is the very adult sounding argument; “Why would I invest my tax-sheltered IRA in an asset like real estate that already has so many tax benefits?”
We see that on the internet… a lot.
Well, let’s think about that a bit.
Tax Advantages of Real Estate Investing
It is no secret that real estate is one of the most tax-favored investments around.
When you invest in real estate such as rental properties, a wide array of deductions become available, including mortgage interest and operating expenses like property taxes and repairs.
Depreciation of real property produces significant tax write offs, especially if you can take advantage of accelerated deprecation with tools like cost segregation.
It is quite possible to have positive cash flow from a rental property and not owe any taxes.
When you sell a property held for more than a year, the income is treated as capital gains, and taxed at lower rate than regular income.
If you utilize a 1031 exchange when selling a property, and re-invest the gains into another property, you can kick the capital gain down the road and avoid taxes for years until you actually just sell and keep the cash. Or, you might die and leave the capital gain to your heirs, but they will only be taxed on the gain from the inherited basis.
If you are a real estate professional who has active involvement in property investing, there are a host of other deductions that become available.
Tax Treatment of IRA Property Investments
When an IRA or 401(k) retirement plan invests in rental property, all of the tax benefits listed above disappear.
An IRA is not taxed on rental income or the gain on sale of a property.
Well, when you don’t have taxable income, you don’t get to take advantage of tax deductions.
At the surface, that all sound good, but what about the exit strategy?
The downside of a tax-deferred IRA is that when you do eventually call in your chips and take a distribution, you pay taxes at regular income rates.
To a tax theory purist, you just took income with a potential for a low tax rate and moved it to a higher tax rate. That sure sounds like a bad idea, doesn’t it?
The Argument Against Real Estate in an IRA
So, let’s go back to where we started: the internet.
A lot of people with credentials like CPA or CFP – or even just folks who have been smart and fortunate enough to accumulate a big bank account – claim that it makes no sense to put a depreciable asset in a tax-sheltered retirement plan.
Why eventually pay regular, earned income tax rates on IRA withdrawals from property investing when a non-IRA investment can be taxed at lower rates?
When you ask the question that way, it does kind of seem counterproductive to invest an IRA or 401(k) in real estate.
But, are you really asking the right question?
We say no.
Apples and Oranges
What tax rate do you pay when you take a distribution from an IRA that has been invested in the stock market?
You pay normal income rates.
So, any distribution from an IRA is taxed at normal income rates, regardless of what type of investment the IRA participated in.
It is pretty simple, but it is a fact that is entirely overlooked by the “why invest an IRA in real estate?” crowd.
The tax treatment of an IRA is just different than the tax treatment afforded to non-IRA capital.
With a tax-deferred IRA, you start with pre-tax money. That means you get more cash to start with than if you paid taxes and put the money in your personal account.
When you invest that IRA money, the income is not taxed. You can then reinvest 100% of the income without a loss to taxation. Compounding that tax savings over a lifetime allows you to accumulate a much larger nest egg than if you had first paid taxes on the original contribution and then paid taxes each year on the investment income.
Yes, you will likely pay more in taxes when you do take distributions, but paying more taxes if you still receive more net spendable after-tax cash in your pocket is still a win. That is why an IRA makes sense.
If we go back to real estate in an IRA, then we have to question; are we even asking the right question? The answer is usually no.
Comparing a hypothetical real estate investment made in an IRA to a similar real estate investment made personally… well, that is just apples and oranges.
Asking the Right Question
Comparing any investment made with an IRA to an investment made personally is not really meaningful. The tax treatment is just plain different regardless of the asset type.
The comparison that we think makes a lot more sense is this:
“How does investing my IRA in real estate compare to what my IRA is invested in today?”
Now we have an apple in both hands. Maybe a pair of nice, fresh, Cosmic Crisps if we are lucky.
For someone who knows how to make money in real estate already, the rest of the conversation is easy.
“Can my IRA investment in real estate provide better principal security, higher income, and more pathways to income than sending my IRA dollars to Wall Street and crossing my fingers?”
“Can I have more control over investment selection and the asset lifecycle putting my IRA in real estate?”
“If I invest $100K of my IRA in real estate today and turn that into $400K or more in the next 10 years, will I be sad that I did not get to take write-offs for depreciation along the way?
Or, Just use a Roth IRA
If you want to win all around, make taxation a non-issue.
With a Roth IRA, all income from investments and all future distributions are tax free.
That sounds better than depreciation recapture and 45-day 1031 selection windows from where we sit.
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Quick answers to common questions
We’ll take you through a simple, step by step process designed to put your investment future into your own hands…immediately. Everything is handled on a turn-key basis. You take 100% control of your Retirement funds legally and without a taxable distribution.
YES! In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) making IRA, 401(k) and other retirement plans possible. Only two types of investments are excluded under ERISA and IRS Codes: Life Insurance Contracts and Collectibles (art, jewelry, etc.). Everything else is fair game. IRS CodeSec. 401 IRC 408(a) (3)
It’s actually pretty simple. Early on, regulators let the securities industry take the lead in educating the public about retirement accounts. Naturally, brokers and banks promoted stocks, bonds, and mutual funds—giving the impression that those were the only allowed investments. That was never true... and still isn’t. You can probably guess why they kept the rest under wraps.
It is possible to use funds from most types of retirement accounts:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Keogh
- 401(k)
- 403(b)
- Profit Sharing Plans
- Qualified Annuities
- Money Purchase Plans
- and many more.
It must be noted that most employer sponsored plans such as a 401(k) will not allow you to roll youraccount into a new Self-Directed IRA plan while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
A Solo 401(k) requires a sponsoring employer in the format of an owner-only business. If you have a for-profit business activity – whether as your main income or as a side venture – and have no full-time employees other than potentially your spouse, your business may qualify. The business may be a sole-proprietorship, LLC, corporation or other entity type.
A self-directed retirement plan is a type of IRA or 401(k) that gives you greater control over how your retirement funds are invested. Unlike traditional accounts held at banks or brokerage firms that limit you to stocks, bonds, and mutual funds, self-directed plans allow you to invest in a wide range of alternative assets including real estate, private businesses, precious metals, cryptocurrency, and more.
These plans still follow the same IRS rules and maintain the same tax-deferred or tax-free benefits as conventional retirement accounts. The difference is simply in how and where you choose to invest.
No. Moving to a self-directed IRA or Solo 401(k) does not trigger any taxes, as long as your funds are eligible for rollover.
Self-directed retirement plans maintain the same tax-advantaged status as traditional plans offered by banks or brokerage firms. The key difference is flexibility—our plans are designed to give you greater control and allow for a wider range of alternative investments beyond stocks, bonds, and mutual funds.
A prohibited transaction is any action between your retirement plan and a disqualified person that violates IRS rules and can lead to serious tax consequences. Under IRS Code 4975(c)(1), prohibited transactions include:
- Selling or leasing property between your plan and a disqualified person Example: Your IRA cannot purchase a property you already own.
- Lending money or extending credit between the plan and a disqualified person Example: You cannot personally guarantee a loan your IRA uses to buy real estate.
- Providing goods or services between your plan and a disqualified person Example: You can’t use your personal furniture to furnish a rental property owned by your IRA.
- Using plan income or assets for the benefit of a disqualified person Example: Your IRA cannot buy a vacation home that you or your family use.
- Self-dealing by a fiduciary (using plan assets for their own benefit) Example: Your CPA shouldn't loan your IRA money if they’re advising the plan.
- Receiving personal benefit from a deal involving your IRA's assets Example: You can’t pay yourself from profits your IRA earns on a rental.
If a transaction doesn’t clearly fall within the allowed guidelines, the IRS or Department of Labor may review the situation to determine if it qualifies as a prohibited transaction.
Disqualified persons are individuals or entities that are prohibited from engaging in certain transactions with your IRA or 401(k). Doing so could trigger a prohibited transaction, which may result in taxes and penalties.
Here’s who is considered a disqualified person:
- You (the account holder)
- Your spouse
- Your parents, grandparents, and other ancestors
- Your children, grandchildren, and their spouses
- Any advisor or fiduciary to the plan
- Any business or entity owned 50% or more by you or another disqualified person, or where you have decision-making authority
These rules exist to prevent self-dealing and ensure your retirement plan remains in compliance with IRS regulations.
(Reference: IRC 4975)
Understanding and following these rules can be tricky, but it’s very doable. The best way to stay compliant is to work with professionals who specialize in self-directed retirement plans. They can help you navigate IRS guidelines and avoid prohibited transactions.
If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.
Yes. While self-directed retirement plans allow for a wide range of investments, there are a few important restrictions.
You cannot invest in collectibles or life insurance contracts, and you must avoid prohibited transactions—activities that benefit you personally rather than the retirement plan. These include things like buying or selling property to yourself or family members, using plan assets for personal gain, or self-dealing in any way.
Violating these rules could cause your entire IRA to lose its tax-advantaged status. To protect your account, it’s essential to work with professionals who understand IRS regulations and can help you stay compliant.
This is a common misconception. In many cases, professionals may simply be unfamiliar with self-directed retirement plans, as they fall outside their usual scope of work. CPAs and tax preparers are trained to file taxes, not necessarily to advise on alternative retirement strategies. Financial advisors and brokers often work for firms that focus on traditional investments like stocks and mutual funds—and may not benefit from or support alternative options like real estate or private lending.
Self-directed retirement investing is legal under IRS rules—but like any specialized area, it requires working with professionals who understand how it works.
The IRS has rules in place to make sure your IRA is used only for the exclusive benefit of the retirement account—not for personal gain or to help family members. These rules can get complicated because there are many ways a conflict of interest can occur, even unintentionally.
For example, if your IRA buys a house and rents it to your mother, you might be reluctant to evict her if she stops paying rent. That emotional connection creates a conflict between what’s best for your IRA and your personal relationships, something the IRS aims to prevent.
These rules help ensure your retirement account stays compliant and protected. (See IRC 408)
Yes. Most tax-deferred retirement accounts—such as Traditional IRAs, old 401(k)s, 403(b)s, and TSPs—can be rolled over into a self-directed IRA or Solo 401(k), depending on your eligibility. Roth IRAs cannot be rolled into these accounts.
You can contribute directly from earned income, subject to annual IRS contribution limits. The method and amount depend on the type of plan you have (e.g., Solo 401(k) vs. IRA).
To take a distribution, you'll request funds through your custodian or plan administrator. Distributions may be taxable depending on your account type and age. Early withdrawals may be subject to penalties.
For 2025, the Solo 401(k) max contribution limit is $81,250 if age 60-63, $77,500 if age 50-59 or 69+, and $70,000 if under 50. Traditional and Roth IRAs have a limit of $7,000 ($8,000 if age 50+). Limits are subject to IRS adjustments.
Yes. IRA contributions are typically due by your personal tax filing deadline (e.g., April 15). Solo 401(k) contributions follow your business tax filing deadline, including extensions.
IRS reporting requirements vary depending on the type of self-directed retirement plan you have. Here’s a quick breakdown of what you need to know
Please note: Our team can help you understand what’s required for your specific account, but we don’t provide tax or legal advice. We always recommend working with a qualified tax professional to ensure full IRS compliance.
Self-Directed IRA (Traditional or Roth)
- Form 5498 – Filed by your custodian each year to report contributions, rollovers, and the fair market value (FMV) of your account.
- Form 1099-R – Issued if you take a distribution or move funds out of your IRA.
- Annual Valuation – You'll need to provide updated FMV for any alternative assets held in the account, such as real estate or private placements.
Solo 401(k)
- Form 5500-EZ – Required if your plan assets exceed $250,000 as of year-end. Must be filed annually by the plan participant.
- Form 1099-R – Required if you take a distribution or roll funds out of the plan.
- Contribution Tracking – Keep records of employee and employer contributions. These are not filed with the IRS but may be needed for tax reporting or audits.
SEP IRA
- Form 5498 – Filed by your custodian to report contributions and FMV.
- Form 1099-R – Filed by your custodian. Issued for any distributions.
- Employer Contributions – Must be reported on your business tax return (and on employee W-2s, if applicable).
Health Savings Account (HSA)
- Form 5498-SA – Filed by your HSA custodian to report contributions.
- Form 1099-SA – Filed by your HAS custodian. Issued for any distributions.
- Form 8889 – Must be included with your personal tax return to report contributions, distributions, and how funds were used.
