Capital Gains in a Roth IRA — and Real Estate's Version of the Trick

Inside a Roth IRA there is no capital gains tax — assets trade, compound, and distribute (qualified) with the gains never taxed at all. That’s the clean answer. The interesting questions are the two that follow it.

Should real estate live inside a Roth?

Self-directed Roth IRAs can hold investment property, and the pitch writes itself: rents and appreciation forever untaxed. The frictions are real, though: no personal use or self-dealing (prohibited-transaction rules with account-destroying penalties), financing triggers UBIT on debt-financed income, all expenses must flow from the account, and — the quiet cost — property in a Roth forfeits depreciation deductions and the step-up at death that taxable-side real estate enjoys. For most investors, the Roth is better filled with assets that lack those outside advantages; real estate brings its own shelter to the taxable side.

Real estate’s own version of “never pay gains”

Held outside retirement accounts, investment property replicates the Roth’s endgame through a different door: depreciation shielding income annually, 1031 exchanges deferring every sale, and the basis step-up erasing the accumulated gain at death. The sequence taxes nothing along the way if run to completion — Roth-like results with leverage, depreciation, and income you can spend before 59½. The two systems aren’t rivals; they’re parallel shelters, and funded investors typically run both: paper assets compounding in the Roth, property compounding through the exchange chain outside it.