7 Ways to Retire on Tax-Free Real Estate Investments

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The average American loses over half a million dollars ($524,625, to be exact) to taxes over their lifetime. And let’s be honest: The average BiggerPockets reader probably pays several times that. 

That puts a huge dent in your retirement nest egg over time. Then, when you actually do retire, you have to keep paying taxes, too. 

But what if you didn’t have to pay any taxes in retirement? How could you get away with that—legally—as a real estate investor? 

Try these tax strategies to avoid paying a dime in taxes on real estate investments in retirement. 

1. REITs (Held in a Roth IRA)

The simplest way to avoid taxes in retirement is to invest with a Roth IRA through your regular brokerage firm. You can open a Roth IRA with your brokerage of choice and then buy shares in real estate investment trusts (REITs) for free. No account fees, no transaction fees, nothing. 

This also means there are no taxes on the dividends in retirement, which is great because REITs typically pay high dividend yields and the IRS taxes dividends at the regular income tax rate. 

I personally no longer invest in REITs—not because of the risk or returns, but because they’re just too heavily correlated to the stock market at large. That defeats the entire purpose of diversifying your portfolio to include real estate. 

2. 1031 Exchanges

At 30, you buy a single-family rental property. At 35, you sell it and roll the profits into a fourplex. When you turn 40, you sell that and buy a 10-unit multifamily. And you keep upgrading your rental investments every five years until you retire at 65, at which time you own a 100-unit apartment complex that generates huge income for you every month. 

If you 1031 exchanged each of those sales and repurchases, you never paid a dime in capital gains taxes or depreciation recapture. You have to keep swapping out income properties while continuing to deduct for ever-larger depreciation write-offs.

In retirement, you live on the rents. Then you kick the bucket, and the cost basis resets, so your heirs don’t pay any taxes on the property either.

Don’t like being a landlord? Me neither. You can also invest in passive real estate syndications and keep upgrading those every few years as well, using 1031 exchanges. 

3. “Lazy 1031 Exchanges”

Personally, I find 1031 exchanges too much hassle. But I still love the premise. So, what’s a passive real estate investor to do? 

When you invest in real estate syndications, they typically come with huge write-offs in the first few years due to depreciation. Then, when the property sells, and you cash out with your profits, you owe capital gains tax and depreciation recapture. 

So? Just keep investing in new syndications, so the write-offs for the new ones offset the taxes on the sold ones. In the industry, we call this a “lazy 1031 exchange.”

You don’t have to fool around with qualified intermediaries, tight timelines, or identifying replacement properties. You just have to invest in new real estate deals in the same calendar year as an old one cashed out. 

That’s especially easy if you dollar-cost average your real estate investments like I do, investing a little in new ones each month. I invest $5,000 each month in new passive real estate investments through a co-investing club. Together, we often invest over half a million dollars, but each individual member can invest $5,000. 

Again, you can keep this going indefinitely until you shuffle off this mortal coil. Then the cost basis resets, and your kids inherit your investments tax-free. 

Oh, and you don’t have to create a self-directed IRA (SDIRA) either, which saves you money and hassle. 

4. Syndications (Held in a Roth SDIRA)

Let’s say you do want to cash these out entirely at some point and park the money in bonds, annuities, or some other “safe” retirement investment. And you don’t want to pay taxes when you do it. 

You can invest in real estate syndications through a self-directed IRA. Some syndications aim for “infinite returns,” where the operator refinances the property after a few years and returns your capital, but you keep your ownership interest in the property. In these cases, you keep collecting cash flow indefinitely—and you probably don’t want to pay income taxes on it. 

If you invested through a Roth SDIRA, you can keep reinvesting the original capital in new deals and keep collecting tax-free distributions from all of them. 

5. Notes and Debt Funds (Held in a Roth SDIRA)

I also like notes and debt funds secured by real property. But they typically pay interest payments, and Uncle Sam taxes interest at the regular income tax rate. 

Plus, you don’t get that juicy depreciation in the early years. Read: no lazy 1031 exchange. 

But if you invest in these secured debt vehicles through a Roth SDIRA, you can keep reinvesting that interest to compound tax-free until you retire and then collect all those interest payments tax-free to live on in retirement. 

In the latest secured note investment we’re making, we expect to earn 16% interest. By investing $100,000, you’d add $16,000 in annual income—all tax-free if you invest through a Roth SDIRA. 

6. Private Partnerships (Held in a Roth SDIRA)

I also love private partnerships on property investments. And you can invest in these passively through your Roth self-directed IRA as well. 

For example, last year, we partnered with a boutique spec home construction company to build a handful of houses together. We expect annualized returns between 18% to 23%. The entire investment will last around 18 to 24 months. 

You could keep turning that investment over again and again and again to keep compounding for high returns in your Roth IRA. 

Granted, those investments were partially financed with loans, which means your SDIRA custodian has to calculate UBIT. That’s not the end of the world, but not everyone wants that extra wrinkle.

Consider another example: We also partnered with a house-flipping company that does 70-90 flips each year. They fund flips entirely with cash: theirs and their partners’. Our partnership with them will flip as many houses as they can in an 18-month window, then close out the investment. It doesn’t require any UBIT calculations because no portion of the properties were financed. 

Again, you could keep rotating those investments over and over in your Roth IRA, compounding quickly and tax-free. 

7. Real Estate Equity Funds (Held in a Roth SDIRA)

Finally, you can invest in private equity real estate funds through your Roth self-directed IRA. 

Some investors I know used a Roth SDIRA to invest in a land-flipping fund last year. The fund consistently earns 30%-35% net returns and pays its investors a flat 16% annualized distribution (paid quarterly). 

Again, distributions are normally taxed at the regular income tax rate. But not if you invest through a Roth IRA. In that case, they simply grow your Roth IRA balance during your working years, and you can keep reinvesting the earnings. When you retire, you can start tapping all that income tax-free. 

As a final thought, you just don’t need as much money saved for retirement if you hold your investments in Roth accounts. When the government doesn’t pull 22%-37% out of your withdrawals, it doesn’t take as much money to generate the income you need. 

Get creative to invest in real estate for tax-free income in retirement. You can get away with a smaller nest egg—especially if you earn strong returns on your real estate investments.