Thinking of using a Qualified Retirement Plan or IRA to invest in a rental property? It may not be the best option. If you borrow to finance the property, you’ll run into the unrelated business taxable income rule, which could require you to pay hefty taxes on your rental income on profits as they are earned inside the Plan/IRA. And you’ll be prohibited from claiming landlord-friendly tax breaks for depreciation, property taxes, and other expenses. Instead, consider investing in a real estate investment trust (REIT) in your Plan/IRA. REITs are required to return at least 90% of taxable income to shareholders, so dividends are typically generous.
SOURCE: Kiplinger’s Personal Finance Advisor, November 2016