buy investment real estate with ira funds?

[knucklehead 61]

is there a way to take some of the $ out of my ira & use it to pay for an apartment building without causing a taxable event?
if so, can i stick the cashflow generated from the apartment building into my general living expenses account or would it have to be deposited back into my ira account?

note: i have a 7 figure ira & this purchase would only represent a 37% withdrawal from it.

note 2: i also own 21 other rental properties (with another house & another duplex in contract to buy & offers on two more that i want to buy, all with cash.)

note 3: i retired last december at 49 & am living very well off the cashflow generated by my rental properties.

note 4: my vanguard funds have been totally flat for the last year. havent made a penny on them, but my real estate holdings have exploded in value & the rents have all been raised, fantastic cashflow even after all expenses.

 

[pb4uski]

Yes, you can. You would need to move some money from your IRA to a self-directed IRA and then the self-directed IRA buys the property, receives the rent, pays the expenses, etc. Remember, the IRA owns the property, not you.

We went to an open house a couple months ago for a single family house that had been rented and the wife held the property in her IRA (we were told).

However, as I thought about it it seems to me a very tax inefficient way to invest as you by-pass the benefit of depreciation and more importantly, capital gains tax rates and all income and gains on the property are ultimately taxed as ordinary income when the property is sold and proceeds distributed from the IRA.

Also, self-directed IRAs have stricter rules as I understand it.

 

[Bruceski44]

Be careful with this. The SDIRA must pay all costs for the property directly. There are also restrictions on what type of property (cannot be vacation home, for your benefit, etc.). In addition, there are Unrelated Debt-Financed Income tax (UDFI) and Unrelated Business Income tax (UBIT) which the SDIRA may have to pay. I suggest you find out more from a seminar or a book. I used this book, but there are many.
The Self Directed IRA Handbook | SDIRA | IRA Lawyer

After considering all of this, I rolled DW's 401k into a fixed-income debt investment in real estate, which has no expenses and uses no financing. There are no tax complications and we get 10% before taxes every month.

To answer your question, the proceeds can be paid out to you each month, from the IRA custodian, as long you are over 59.5 or are taking substantially equal lifetime payments if younger.

I was bothered by the flat stock market last year also, so took a loan on my 401k of about 10% of the total and invested that in real estate. The interest gets paid back to my account. The downside is losing out on the compounding of the missing 10%, but it's small and it's easy to exceed market returns.

There's been some talk that RE is in a bubble, or at least nearing the top of the cycle. You getting a good deal on the bldg? CAP rate > 5?

 

[wolf]

How would you handle, IRA RMD, if real estate appreciated a lot?

 

[Bruceski44]

in-kind distribution to meet RMD

The custodian can do an "In-kind distribution" to transfer the RMD out of the tax-deferred account into a taxable account. The government is happy as long as it gets its pound of flesh and it's basically a paperwork exercise for the custodian. There's no need to sell the underlying investment, part of it gets put in a different (taxable) account.

It would have to be appraised to quantify the appreciation.

 

[gerntz]

There are no tax complications and we get 10% before taxes every month.

120%/yr is one heck of an investment. Congratulations!

 

[Bruceski44]

Sorry. 10% APR paid monthly

 

[knucklehead 61]

Sorry. 10% APR paid monthly

your doing pretty good there.
i typically get between 7-15% cash on cash return after expenses on my rentals.

 

[knucklehead 61]

after reading everyone's replies on here & on bigger pockets (a real estate investors forum) i decided that there is no way to make the apartment building deal work using my ira/401k funds, so i'll leave them alone.
i had previously taken a 50k loan out of my 401k to buy a rental & that was a very good investment. a few months later when i quit my job & retired i had to pay the loan off, which i was able to do from my cash reserves that had built back up over a month & a half. this early retirement life is pretty friggin' sweet right now!