Roth IRA Conversions and Commercial Real Estate: Unlocking Tax-Free Growth

For many investors, tax efficiency is the overlooked multiplier of wealth. One powerful yet underutilized approach combines Roth IRA conversions with commercial real estate development investments, creating significant tax advantages through strategic timing.

In this episode of Peachtree Point of View, Greg Friedman, CEO of Peachtree Group, speaks with Tim Witt, leader of Peachtree's Delaware Statutory Trust (DST) program, about how Roth IRA conversions can unlock powerful tax-free growth when paired with commercial real estate strategies.

Two Paths to a Roth IRA

Direct Contributions: Investors with income below the limits can contribute up to $7,000 annually ($8,000 if age 50 or older) with after-tax dollars. These accounts grow tax-free, and withdrawals in retirement are also tax-free. Learn more about Roth IRAs directly from the IRS.

"The quickest way to multiply your wealth is through tax efficiency. Sometimes that gets missed as people are chasing returns." — Greg Friedman

Conversions for High Earners: For those with incomes above the threshold, direct contributions are not permitted. Instead, investors can use a Roth IRA conversion, often referred to as a "backdoor Roth," by transferring assets from a traditional IRA or a former employer's 401(k). Taxes are paid at the time of conversion, but from then on, all growth is tax-free.

The Commercial Real Estate Advantage

Tim Witt, who leads Peachtree Group's DST and tax strategy programs, explains how the conversion strategy works: "The key to doing this conversion is being able to transfer assets when they're at a lower value."

This approach leverages the natural "J-curve" pattern of development projects, where valuations temporarily decrease during construction phases.

The mechanics are straightforward but require precision. Investors place funds in a self-directed IRA and invest in commercial real estate development projects. Midway through construction, when projects typically show reduced valuations due to development costs, incomplete construction, and liquidity constraints, investors execute the Roth IRA conversion.

"That's when the value is going to return and hopefully far exceed the initial investment you put in," Witt notes.

The Roth IRA Conversion in Practice

Consider this scenario: A $100,000 development investment might appraise at $60,000 during mid-construction. Converting at this lower valuation means paying taxes on $60,000 instead of the original $100,000 investment. As the project completes and stabilizes, the full value returns, but now grows tax-free within the Roth IRA.

"There's no benefit on losses in a Roth. If you lose money in a Roth, you don't get to write that off your taxes. So you want to be very thoughtful in terms of the quality of the projects that you're investing in," Witt emphasizes.

This strategy particularly benefits investors earning above Roth IRA contribution limits ($165,000 for singles, $246,000 for married couples) who have existing traditional IRA or 401(k) funds available for conversion.

Key Takeaways

1. Strategic Timing Maximizes Benefits: Execute conversions when development projects show temporary valuation decreases during construction phases.
2. Quality Projects Essential: Tax efficiency means nothing without sound underlying investments; due diligence remains paramount.
3. Gradual Conversion Preferred: Spread conversions across multiple years and projects to minimize annual tax impacts and diversify risk.

The combination of tax-efficient structures and high-quality commercial real estate development can significantly accelerate wealth accumulation for qualified investors.

For more insights on tax-advantaged structures, you can also explore our Opportunity Zone strategies.

Listen to the Full Episode

Catch the full Peachtree Point of View podcast episode featuring Tim Witt’s complete breakdown of Roth IRA conversion strategies, and learn how Peachtree Group’s development expertise can enhance your tax-efficient investment approach.

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