Using IRA's for Real Estate Investment

Comments(5)

• 
  18th March, 2003

  Joel:
  
  You could use a "self-directed IRA" to invest in real estate, but there a number of rules you must follow to avoid "self dealing" issues under the Internal Revenue Code. If those provisions are not complied with, the funds you use could be subject to income tax and the 10% withdrawal penalty because it will be as if you took the funds out of the IRA and invested the money in real estate. Probably not a result you want!
  
  If your present IRA custodian does not permit self-directed IRAs, they you would have to look for a new custodian to transfer your funds to.
  
  Also, the fees for doing these types of transactions are greater, because the custodian has to review the deal to avoid breaching its fiduciary duties with handling your IRA funds.
  
  Taxjunkie

• 
  joel18th March, 2003

  I know that it was a bit tricky to do. I would just like the best of both worlds; the Roth IRA and real estate investing.
  
  I will check into these, thanks for your help.

• 
  joel18th March, 2003

  Well guys, I guess I will have to pass on this deal since I plan on managing the property myself.
  I would think that using an IRA would be great matched up with purchasing properties SubTO. But I don't know if you would have to purchase the property outright rather than taking over the payments. Here is what I read
  http://moneycentral.msn.com/content/Investing/Realestate/P39217.asp

• 
  DaveT20th March, 2003

  Joel,
  
  I would be concerned about Unrelated Business Income Taxes (UBIT) if the real estate were not completely financed by the IRA.
  
  If your IRA is self directed, here is how you might approach the problem. Form a limited partnership to purchase your property. The IRA provides cash to fund a deal by having the IRA purchase units in your LP as a limited partner, waiving rents. You become the general partner and manage the property, then when the property is sold, you redeem the units your IRA purchased with a share of the profits in proportion to its ownership interest.
  
  Your IRA custodian probably deals with these types of issues all the time and would be able to give you the best advice in this area.

• 
  gbtjom1st April, 2003

  Here another method: Instead of an IRA (code 408 of IRC) set up a Pension Plan for your company (ie 401k).
  
  Benefits:
  
  1) You can be your own custodian
  2) Since it is under IRC 401 there is NO UBIT if you take the property with leverage (ie Sub2, another loan, whatever).
  3) There seems to be better asset protection with a IRC 401 type plan
  
  Negatives:
  1) More costly. Although this is generally true I've found it really isn't all that much more.
  2) You need to do your own 5500 tax sheet at the end of the year if plan has more than $100K in it. No big, once you do it one time.
  
  Some thoughts: I don't see much advantage of buying RE with a tax deferred account since you lose all the tax advantages that RE allows. If it's a Roth IRA that's another matter
  
  I think it is FAR better to buy notes with your tax deferred account because notes don't have many tax advantages so tax deferral is your only hope. Unless, we are talking about the Roth that is...
  
  Good luck
  
  jom