Real Estate Roth

[boont]

I understand that I can own real estate in a Roth IRA. Anyone know about these?

Like to buy an apartment building in my Roth, keep it for twenty years of appreciation and sell it tax free.

How about it?

b.

[boont]

Found some info...

Distributing Your Property
You can withdraw real estate from your IRA and use it as a residence or second home when you reach retirement age (age 59½ or older for a penalty-free withdrawal). At that time, you can elect either to have the IRA sell the property or take an in-kind distribution of the property. Under that arrangement, your IRA custodian assigns the title to the property to you. You will then have to pay income taxes on the current value of the property if it’s been held in a traditional IRA. If the property was held in a Roth IRA, you won’t owe taxes at distribution. This makes a Roth IRA extremely attractive if you anticipate that your real estate investments will appreciate over time.

Whether your retirement strategy is to hold properties or buy and sell for gain, real estate investing through your IRA can yield extraordinary returns toward your future retirement.

b.

[boont]

Is anybody else interested in this or is it just me?

More info...

"A Roth IRA allows the investor to benefit from tax deferral while it is growing and to be free from tax on distribution in contrast to a traditional IRA which is taxed at time of distribution. Nor is there a minimum distribution and investors can also continue to pay into Roth IRAs which can be of benefit if they intend to pass them to their heirs (which can be done without taxation). In addition, unlike 1031 exchanges, there are no specified investment timeframes or requirements to procure 'like kind' investments. Finally, capital gains tax is not applied since taxation does not occur until distribution."

b.

[retire@40]

How are you going to put an apartment building in a Roth IRA when the maximum annual contribution is $4K to $5K?

[Martha]

Maybe his Roth has a bunch of cash to buy property.


There are a number of problems with putting real estate in an IRA. Potential tax issues arise if you plan to borrow money to buy the real estate. So it may be best to use all cash. Or invest in a TIC (I should say that I really don't like TICs as an investment vehicle). Another is that you wouldn't get the benefits of depreciation deductions.

[tryan]

keep it for twenty years

This is the part I couldn't buy into ... see myself selling alot sooner (and paying the piper).

Too many places to go, people to see, to be locked into 20 years.

[boont]

Martha, an example would be...

If you had $50,000 in a Roth you could put half down on a $100,000 building and use a bank loan for the other $50.000

After holding this in your Roth for say 20 years you would be able to withdraw half of all rents and appreciation tax free. The financed portion would be taxable.

Still 50% tax free isn't bad.

Also, you could either use taxable money for the other half doing it in an LLC. Again paying tax on that 50% but none on the other.

Or going in with a partner. You would then get 100% tax free withdrawal on your half.

Or you have a lot of money in your Roth

Still researching this but that is what I know so far. Open to other opinions. I certainly just found out about this.

boont

[Martha]

It likely will be difficult to get financial institutions to lend money to an IRA to make a leveraged purchase of real estate. And as owner of the IRA, you are an interested person so you cannot make or guaranty the loan.

The tax situation with the leverage is kind of complicated. The IRA has to pay taxes on the income attributable to the leveraged portion. The IRA has to pay the tax so there has to be enough money in the IRA to pay it. Also, the rates are at the trust rate which is very likely to be higher than your individual tax rate.

[work4beer]

You might be better off buying REIT shares, or a REIT fund (e.g. VGSIX) instead for a lot less hassle. VGSIX in my Roth has done better than my house (which has done well!) the last 7 years....

[Sammy]

Hello boont: Yup, you can buy an apartment building with IRA money. But you cannot have a mortgage on it. The example would be, say you had $200,000 in the IRA, and you buy a small apt. building with it.

[boont]

Martha, You use a custodian just like in a 1031 tax free exchange...

"Most IRA custodians that hold real estate will usually allow you to purchase raw or vacant land, residential properties, or commercial buildings for your portfolio. In addition, some custodians may permit foreign property or leveraged property.

Since buying a property may require more funds than you currently have available in your IRA, you also can have your IRA purchase an interest in the property in conjunction with other individuals, such as a spouse, business associate, or friend. Also keep in mind that if the property is leveraged, the debt must be a non-recourse promissory note."

Sammy, of course you can have a mortage. Read earlier posts.

boont

[Martha]

Originally Posted by boont

Since buying a property may require more funds than you currently have available in your IRA, you also can have your IRA purchase an interest in the property in conjunction with other individuals, such as a spouse, business associate, or friend. Also keep in mind that if the property is leveraged, the debt must be a non-recourse promissory note."

Tough to find a lender to loan non-recourse unless it is part of a pretty significant investment. I doubt you will find a nonrecourse lender for a small rental property.

So your IRA ends up investing in property with others. Might as well invest in a good REIT.

Now that I am done poo pooing your plan, I can see some situations where this would work pretty good. For example, I am considering investing in a real estate partnership as a passive investor. I have some cash equal to the amount needed to invest in an IRA. I could buy the investment with my IRA.

[Sammy]

I don't believe one can have a mortgage in an IRA. If so, why not just borrow a few Million dollars, put in your $10,000 from the ROTH, and let the 100 suiter pay off the mortgage tax free? The IRS isn't stupid. They won't let you do it. And if you're going to have to put IRA money in with other partners, in effect you ARE paying cash for your portion, and not having a mortgage on the IRA property. A CPA told me this.

[Martha]

Originally Posted by Sammy

I don't believe one can have a mortgage in an IRA. If so, why not just borrow a few Million dollars, put in your $10,000 from the ROTH, and let the 100 suiter pay off the mortgage tax free? The IRS isn't stupid. They won't let you do it. And if you're going to have to put IRA money in with other partners, in effect you ARE paying cash for your portion, and not having a mortgage on the IRA property. A CPA told me this.

Sammy, you are not quite right. The reason it works from the IRS point of view in the messy concept of unrelated business income tax or UBIT. For example, if an IRA forms an LLC to buy and operate a business unrelated to the purpose of the IRA, the net income will be taxed as UBIT (at the trust tax rate).

In addition, tax is applied to that portion of the gain that is debt-financed. This income is called unrelated debt financed income or UDFI, which is a subset of UBTI. These adverse tax consequences can put a big damper on having heavily leveraged real estate in an IRA. Also, as I previously mentioned, it is hard to find a lender who would make a nonrecourse loan.

[boont]

Sammy, I am afraid you are wrong about that. Here is some information from MSN Money.com by Jeff Schnepper their real estate guru...

"If you buy a property for your IRA, the income and appreciation normally builds up tax-free until you start to take withdrawals.

Careful now: I said normally tax-free. That’s because there’s a special tax on debt-financed income in retirement plans called the unrelated business income tax (UBIT). If the real estate is mortgaged, then you must file Form 990-T with the IRS. It allocates the income earned between debt and non-debt financing, and the tax due. So, let’s say you want to buy a $100,000 duplex for your retirement account. You put in $70,000 and borrow the remaining $30,000. On a simplified calculation with the UBIT, you’d be able to shelter only 70% of the income. The rest of the income from the property is subject to ordinary income tax rates."

Notice he said, "you borrow the remaining $30,000"

And...

"You can use a Roth individual retirement account, a traditional IRA or even a single-participant 401(k) to purchase real estate. All you need is a custodian that allows real estate investments. Check out Entrust Administration for single-participant 401(k)s and self-directed retirement plans. (You'll find a link at left under Related Sites.)

Watch out for other traps. You can’t transfer property you already own into a retirement account. You also can’t buy a vacation house and rent it out to yourself. That’s called “self-dealing” and is a prohibited transaction. It covers your family members as well."

boont

[Sammy]

boont & Martha! Yikes! I thought I didn't understand the CPA ! This discussion is way over my head! Thanks for the info. I'll be happy if I can find reasonable health care. You're both very educated in this! Thanks.