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Real Estate In A ROTH
Old 07-02-2011, 06:13 AM   #1
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Real Estate In A ROTH

Hi Folks,

A condo in our gated community has come up on a short sale for $100k.

View Listings

These were going for $230-260k 3 years ago. It is furnished. At $77.00 a square foot it is in my opinion, a great deal. It is in North Myrtle beach, 5 minutes form the beach, on a golf course, two pools, tennis courts, a gym and a beach cabana with parking etc..

DW and I have several Roth IRA's at VG. Can we buy it via one of those?

Anyone done it? Any tax advantages, disadvantages.

Thx

Wally
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Old 07-02-2011, 01:42 PM   #2
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Hey Wally,

Is $100k in RE what your IPS says about your AA? If so, it would not seem to provide much diversification.
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Old 07-03-2011, 01:13 PM   #3
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I think itís a very poor idea to use tax deferred accounts such as IRA, ROTH, 401K etc to buy real estate. It can be done & is legal but it becomes very tricky very fast.
Advantages:
  • Any sale gain is tax deferred because itís held in the tax deferred account. This of course means no long term capital gain tax rate, only eventual income tax rates when you pull the sale funds from the account.
  • You can incrementally with draw the funds spread over time, depending on the account type, instead of getting the money in one lump sum.
  • There may get an inheritance advantage, I didnít investigate this aspect too much.
Disadvantages:
  • You need a special arm length trustee to handle all transaction and I mean all transaction involving the property. They exist but are more expensive than a normal trustee.
  • Anything you want done to the property, such as repairs, alterations etc. have to be done, by the trustee, at your direction of course.
  • Any money used for these activities has to come only from the trustee using the tax deferred account. Using personal funds will, I believe, void the tax deferred account and cause the entire balance to be considered a withdrawal.
  • Unless youíre paying cash for the property, I think youíll have a hard time getting a loan. Your cosigning the loan would probably void the accountís tax status.
  • If you get a loan, all payments have to be paid from the tax deferred account and I donít believe you get to write them off on you taxes.
  • All condo fees, assessments, property tax etc. have to be paid from the tax deferred account, not you personally and I donít believe you get to write them off on you taxes.
  • You cannot contribute to the tax deferred account beyond the legally allowed limit.
  • If you turn the property into a rental, all the income goes to the tax deferred account, you cannot touch it without it being considered a withdrawal.
  • If itís not a rental, upon sale it does not qualify for the personal residence exclusion. If itís a rental, youíd better have a good tax accountant & tax attorney.
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Old 07-03-2011, 01:24 PM   #4
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You did not describe your reason or goal.

Are you going to use it or flip it (in the future) for a profit? Or do you intend to rent it?
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Old 07-05-2011, 07:10 PM   #5
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Quote:
Originally Posted by chinaco View Post
You did not describe your reason or goal.

Are you going to use it or flip it (in the future) for a profit? Or do you intend to rent it?
Sorry, away for the 4th. Thought is to rent it for a few years. Should in theory break even and when it appreciates sell it. Still grinding numbers but seems crazy that you can buy a beautiful condo in great community for less than $100 a sq foot. You can't come close to building one for that.

Thx

Wally
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Old 07-05-2011, 07:12 PM   #6
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Quote:
Originally Posted by HpRyder View Post
I think itís a very poor idea to use tax deferred accounts such as IRA, ROTH, 401K etc to buy real estate. It can be done & is legal but it becomes very tricky very fast.
Advantages:
  • Any sale gain is tax deferred because itís held in the tax deferred account. This of course means no long term capital gain tax rate, only eventual income tax rates when you pull the sale funds from the account.
  • You can incrementally with draw the funds spread over time, depending on the account type, instead of getting the money in one lump sum.
  • There may get an inheritance advantage, I didnít investigate this aspect too much.
Disadvantages:
  • You need a special arm length trustee to handle all transaction and I mean all transaction involving the property. They exist but are more expensive than a normal trustee.
  • Anything you want done to the property, such as repairs, alterations etc. have to be done, by the trustee, at your direction of course.
  • Any money used for these activities has to come only from the trustee using the tax deferred account. Using personal funds will, I believe, void the tax deferred account and cause the entire balance to be considered a withdrawal.
  • Unless youíre paying cash for the property, I think youíll have a hard time getting a loan. Your cosigning the loan would probably void the accountís tax status.
  • If you get a loan, all payments have to be paid from the tax deferred account and I donít believe you get to write them off on you taxes.
  • All condo fees, assessments, property tax etc. have to be paid from the tax deferred account, not you personally and I donít believe you get to write them off on you taxes.
  • You cannot contribute to the tax deferred account beyond the legally allowed limit.
  • If you turn the property into a rental, all the income goes to the tax deferred account, you cannot touch it without it being considered a withdrawal.
  • If itís not a rental, upon sale it does not qualify for the personal residence exclusion. If itís a rental, youíd better have a good tax accountant & tax attorney.
HI,

Yeah, came to the same conclusion. Not a god move in an iRA.

Thx

Wally
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Old 07-05-2011, 09:27 PM   #7
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You need to check to see if the unit can be rented and other restrictions that may apply. Personally, I wouldn't do it.
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