Discussion:Owning Real estate in a IRA
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Discussion Forum Index --> Tax Questions --> Owning Real estate in a IRA
| 4 February 2006 | |
| New to this page: I need to know all I can about owning Real estate in a IRA? What type of Trusts typically handle this. Banks, Stock brokers, etc. I'm aware that it must be investment property with no user benifits. | |
| 4 February 2006 | |
| How about just giving me a starting place for information on how to? | |
| 4 February 2006 | |
| You will need to find a individual willing to act as trustee, usually an attorney. The customer charge I have seen is 1% per annum. for this service. Banks and brokerage firm will usally not go near this. | |
| 4 February 2006 | |
| Can you buy the real estate property with the existing funds in the IRA? | |
| 4 February 2006 | |
| hi yes you can buy almost any investment in an IRA except collectibles. your biggest problem is finding a trustee who will let you. bye | |
| 4 February 2006 | |
| I received this e-mail the other day maybe this company can help??? I am not affiliated and make no recomendation.
HOW TO BUY REAL ESTATE IN IRAs & ROTH 401(k)s ATTEND FREE WEBINAR hosted by PENSCO Trust Company. Boomers are counting on you for more than just tax returns. Are you prepared to tackle their financial planning questions? Open up new markets for your practice with self-directed IRAs. Learn how to set up self-directed retirement accounts to invest in real estate, private placements, businesses, notes & more. | |
| 2 March 2006 | |
| Hello,
We use Pensco Trust to act as the trustee for our client's IRA's that invest in real estate. We have has no complaints with the company and the fees are very reasonable. | |
Mtmckeecpa (talk|edits) said: | 3 March 2006 |
| RBrothers,
Another administrator is Entrust. Check www.entrustfl.com. Full disclosure here: I sponsor seminars about self directing IRAs. It can be a good opportunity for those who want more control of their IRA. If you buy Real Estate and take on debt (nonrecourse) watch for the Unrelated Business Income Tax and filing form 990-T. Also, make certain that you don't invest in a prohibited transaction and or invest with a disqualified person. One of the better books I have read is IRA Wealth by Patrick Rice. This discusses generally and in some detail about self directing your IRA. Good Luck. | |
| 3 March 2006 | |
| Additional caveats include making sure there is enough cash flow within the IRA to allow for payment of property taxes, upkeep, etc and you don't run afoul of the contribution limits. Also, careful of the minimum distribution requirements and how you will fund those with (illiquid) real estate. Finally, the benefits of long term capital gain treatment on the appreciation of the real estate are lost as all IRA distributions are ordinary income. I don't recommend using and IRA to own real property. | |
| 3 January 2008 | |
| Pensco has popped up in my practice. What if the tax client buys land in a foreign country, with plans to subdivide it and build a residence on one lot. The residence may be initially leased as a rental property, and may become a family residence at some point. Would this not be a taxable distribution for any personal use? | |
| 3 January 2008 | |
| It would be more than that -- it would be a prohibited transaction, wouldn't it? | |
| 6 June 2009 | |
| I just ran across a financial planner that put on a program to a group of realtors and I happened to find out about it so I went. I think it is an interesting field as many investors don't now want as much money in the stock market or bonds. They want some diversification into non-traditional types of investments. One of the presenters was an attorney from Provident Group or ProvidentIRA.com. They are a non-traditional type of IRA/401k/HSA custodian. I think we will see more and more of this as I have had clients and prospects come to me for this type of guidance since the market fell last year.
I just went through the excersise of preparing a sample 990-T form with Schedule E and the "unrelated debt-financed income" calculation to make a proposal to an interested realtor that has already put some real estate into an IRA. The return itself is not terriby difficult once you gather all of the data. Losses go forward, but profit on the debt financed portion are taxable. I am interested in hearing other input from anyone preparing these kind of returns. | |
| 6 June 2009 | |
| Downsides are this - You're converting potential LTCG income into Ordinary Income. All distributions from IRA's represent ordinary income (unless you have some basis). In addition, real estate often throws off losses on an annual basis. These losses can't be claimed if locked inside of an IRA. And finally, you can defer gains on real estate sales with Section 1031. | |
| 8 June 2009 | |
| Whoever said real estate is ALWAYS a good investment? Look at real estate prices NOW!!! Imagine being 60 to 65 years old with all stocks or all real estate in your IRA for the past 10 years! Can you say "Hi, welcome to Walmart"?
I don't like real estate in IRAs because of the caveats listed above. Cash flow and liquidity are big problems. | |
| 9 June 2009 | |
| I concur with all of the above downsides and will add another. Have clients that tried to do this; cashed out their 401ks rolled it into self-directed IRAs. Found out they couldn't get a loan on a property when trying to buy in an IRA. Ended up paying big fees and even bigger taxes & penalties when they liquidated the IRA to buy the real estate. | |
Mtmckeecpa (talk|edits) said: | 9 June 2009 |
| An IRA can get a loan to acquire Real Estate...but it must be a NON recourse loan, I am sure these are still available but normally require a good bit down on the property.
I've seen people really botch these IRA real estate transactions...and ends up costing them a lot, unfortunately. It can be done...but the taxpayer needs to do their due diligence. Pensco, Entrust all have good information. | |
| 9 June 2009 | |
| I have a self directed IRA that invests in real estate. I first invested in an LLC that the IRA owns 1/3 of. The other owner signs for the loans (non-recourse to the IRA, recourse to her). Also, if there is a cash flow problem and there isn't enough money to pay for expenses, the IRA and the other partner can contribute additional monies. (So long as the IRA owns less then 50% of the LLC it can make additional contributions.) The company has a positive net cash flow of about $900 per month. The money gets distributed back to Equity Trust (another trustee company)every month and when I have enough, I can use it to invest in more real estate. It is a Roth IRA, so when I turn old enough to take distributions (in about 30 years), all of the income will be tax free, including the appreciation on the property when sold. I think investing in Real Estate is a great way to build wealth through your IRA. | |
| 9 June 2009 | |
| No offense, Letto, but you don't have any credentials for giving investment advice. | |
| 9 June 2009 | |
| I'm not giving investment advice. I'm relaying my personal experiance. This is a board for tax professionals, not people looking for investment advice. Many other people have commented on why investing in real estate is a bad idea but you didn't say anything about that. I'm simply giving reasons why, for me, it works. | |
| 9 June 2009 | |
| I have no problem with sharing your experiences from your personal view, I'm just pointing it out to others to be careful what they might perceive to be 'advice'. | |
| 10 June 2009 | |
| There's more horrible tax advice on this site than there is horrible investment advice. | |
| 19 June 2009 | |
| Thanks for the additional recent contributions to this topic. I think Letto115 does have some understanding that the financial planner I met did. He does like the option to convert the IRA to Roth next year and that would make the future capital gain tax-free and he also likes the recent real estate prices in the market potential of increasing gains. But he does realize the issues of having cash flow available in case of inability to rent for a period of time. So for those clients that have more than a small amount in an IRA that could diversify into real estate and express interest in such, I think it is worth talking it through. If a client wants to do this, I would suggest that they also have part of their IRA money in fairly liquid assets that could be used for several months should the property not be rented or other worst case scenarios. If they do put debt on the real-estate and have to file the 990-T form, I would also suggest that they plan on paying off the property a year before sale (to avoid 990-T tax on the property gain--this would seem like a double tax if you also had to pay tax on the distribution). The other thing that I have noted is that S/L depreciation still might cause losses on some properties that would carryover on the 990T, so you would want to plan to use those up also by the time of the sale. So it might work well for someone still in the work force that can continue to fund enough IRA contributions or that has other IRAs that could be rolled over to pay-off the debt for instance. May you all have much success! Sheldon | |
| 5 August 2009 | |
| If a client owns part of the real estate whereas his Roth IRA owns part of the same real estate property, would that be a prohibited transaction? Thanks. | |
| 5 August 2009 | |
| I have to respond to Uaeral.
This is a Discussion Forum, not a forum for giving specific advice. The goal is to discuss complex topics & see what other professional are thinking, how they interpret the rules, and what their experiences have been. There's no way anyone should be coming here for definitive advice that they rely on without any other analysis. | |
| 5 August 2009 | |
| Sayeth Sheldon: "I just ran across a financial planner that put on a program to a group of realtors and I happened to find out about it so I went. I think it is an interesting field as many investors don't now want as much money in the stock market or bonds. They want some diversification into non-traditional types of investments."
I'm coming down with a headache. Stocks and bonds may not seem to have much to offer at the moment, but they do have the tremendous advantage of having a liquid market, and that makes ALL the difference in the world when you go to cash out, or to readjust your portfolio mix. As for real estate, I wouldn't be putting real estate in an IRA, unless perhaps it was a Chinese IRA (which they refer to as the IPLA (Individual People's Liberation Army Account). Of course, this is merely my opinion,and no one should follow anything I say. | |
| 5 August 2009 | |
| Ok, invest it all in real estate then, as long as you don't follow anything I say. | |
| 5 August 2009 | |
| I put self-directed IRAs into the same category as incorporating in Nevada or stock-option trading seminars. Just another way to make the customer think they are creating wealth while they are doing the opposite.
I call this the "Field of Dreams Fallacy". Just because you build it, does not necessarily mean they will come. I always love it when the presenter tells the customer (read 'sucker') that most CPAs do not understand these things, so that is why you do not hear about this from your CPA. | |
| 5 August 2009 | |
| Aha! I bet they went to the same school as the mortgage brokers that insist on the "CPA Letter". | |
| 5 August 2009 | |
| People make an elementary mistake. They "reason" that real estate is cheap, HENCE it is undervalued, and I am going to get a great bargain in something that will skyrocket in price in just a few years.
Whereas, the other possibility is that real estate is cheap because it should be cheap, it is "worth less", or as I like to put it, worthless. And, WHY would this be so? Simply because most of the leverage has been sucked out of the system that artifically pushed up prices for years. And HOW long might this last? Well, the same thing happened to Japan in 1990, and I don't think they are doing that swell even up to today. I just wouldn't go "gaga" over real estate right now, but it's just my opinion. Now, if you wanted to sell me a hectre or two in China right now, I might be interested. Maybe. | |
| 5 August 2009 | |
| Hector is in Cuba, but Feng is in China. For the right price, everything is for sale in China. | |
| 5 August 2009 | |
| I have to be careful, or I'll get accused of being a guai lo again, or a "lao wei" (Mandarin)!
I've seen the cry go up from the village as I've rounded the corner on foot, more than once. I made the mistake one time of hollering back: Yuan lo! Well, I had to spend the afternoon in the hospital, but that evening, all had settled down, and we took a page of of Obama's book, and had a beer together. | |
| 5 August 2009 | |
| lol. I think that's Mandarin for white devil. Guai lo is the Cantonese version of white devil (a popular, and unfortuneatly, historically well deserved appellation). Yaun lo is my poor attempt in translating "Yellow Devil", but I think it may come out golden devil, generally, I would deem that to be close enough. The fact of the matter is, they have us wooped! Better to get over there while we can! | |
| 11 November 2009 | |
| I hadn't read the thread for awhile, but thanks for the responses. I understand the liquidity concerns and real estate in an IRA is not for everyone. Anyone that goes this route should have substantial IRA funds elsewhere as being cash short on a rental property is all too common when the property is not rented. You will also have to be prepared for bad markets or other slow sales when you are ready to convert to cash at retirement.
But since all can convert to ROTH IRA next year, it is a way to get tax-free capital gains on property that you are holding for the long-term. I can't knock that potential. Some fix-and-hold (not flip) realtors smell an opportunity here. After seeing what they did with the 11/6/2009 Homebuyer Credit law, it appears this congress is desperately trying to help the real estate industry. I just realized that a person who has owned a home for 5 years can rent it out and purchase a less expensive home and then get the credit. I think this may interest some people. | |
| 11 November 2009 | |
| I think we should have the following less judgmental racial terms:
A. Pink B. Tan C. Brown D. Mahogany | |
