Experienced Self-Directed Real Estate IRA investors sometimes own properties within multiple states to maximize their chances of success. But is this always a good strategy? For the beginner, it’s usually best to avoid out-of-state real estate investments, especially if you have enough trouble securing a great rental property in your own state.
Avoid the temptation to look elsewhere for the answers and concentrate on learning more about real estate in your home state. Don’t believe us? Here are some reasons you might want to avoid out-of-state investments:
Taxes Get More Complicated Across State Lines
When you have a Self-Directed IRA, a job, and a home all in one state, your state taxes can be relatively straightforward. You do not have to think too much about which state you were in on this date, or the income that you generated from another state.
When you cross state lines, things tend to get a little messier. Not only do you have to think about the local taxes in an entirely new area, but your overall tax return will be much more complicated. That adds to your headaches around tax time, even if you do your best to keep the rest of your finances simple.
More Complicated Property Management
Because you have to keep real estate within a Self-Directed IRA separate from your personal ownership, you’ll be using property managers to collect rent. This is an advantage in many cases. But going across state lines can sometimes throw a wrench in these plans.
For example, if you have to use two different property managers for two different properties—given the realities of logistics in two different states—it will complicate your account more than necessary. While you could have a property, manager handle multiple properties in your local area, going across state lines sometimes means this isn’t possible.
The Lack of Physical Presence
Keeping tabs on your real estate empire is more difficult to do when the logistics do not make any sense. While you should not physically stay in your real estate properties for IRA purposes, you should note that your lack of physical presence in another area can be a hindrance. For example, if you wanted to check out a neighborhood that might be worth investing in, a local neighborhood is just a drive away. But when you want to get a full accounting of what a neighborhood looks like in another state, that becomes a different prospect entirely.
The Lack of Flexibility
Having a real estate property located closer to you also gives you more flexibility. You can simply do more when your real estate investments are nearby. You can more quickly shop around with property managers, you can look at other properties in the area, you can get a lay of the land. It’s simply not something you can do when you own property in other states.
But even with all of this in mind, we would be remiss if we did not mention the potential advantages of owning property in other states, including:
- Different taxes. This can sometimes work to your advantage. If you move to another state and maintain property in your current state, your income taxes will change—and sometimes for the better, depending on the state laws.
- More options. Although this doesn’t negate any of the points above, holding a Self-Directed Real Estate IRA can open up lots of flexibility. That’s especially true if you expand your focus to a wider range of real estate options, including different states.