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Second home with IRA proceeds
Old 03-23-2017, 04:24 PM   #1
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Second home with IRA proceeds

Hi everyone - first time caller, long time listener......I'm wondering if anyone has any thoughts/experiences with purchasing a second home using IRA funds (post-retirement of course!). At retirement I would have funds available to purchase a home for cash, but the tax hit would be substantial if taken out at once. For example purposes, let's say the home in question would be $250k.

Short of phasing out the withdrawls over a period of time (say 5 years), what other strategies would work to limit the tax impact of this type of transaction?

TIA
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Old 03-23-2017, 04:36 PM   #2
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I heard about self directed ira real estate but don't have any personal experience with it. Perhaps, someone here could teach us some.
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Old 03-23-2017, 04:42 PM   #3
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It is permissible to hold real estate in an IRA account. However, it cannot be for your own use.

To reduce the tax burden, the OP can obtain financing with a shorter term, such as a 10-year mortgage. Qualifying for such a loan can be tricky, because the banks are not accustomed to people determining their own income through IRA withdrawals.
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Old 03-23-2017, 04:45 PM   #4
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It is permissible to hold real estate in an IRA account. However, it cannot be for your own use.
Thanks.

What can we do with the house?
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Old 03-23-2017, 04:47 PM   #5
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Get a loan on your 2nd home and then pay the payments with IRA withdrawals over time. Or use a HELOC off your first home and pay it down over time with IRA withdrawals. Should ease the tax hit but you will still have a mortgage!
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Old 03-23-2017, 04:49 PM   #6
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Thanks.

What can we do with the house?
Real estate held in an IRA is strictly for investment (flipping), or for rental.

Any expenses incurred, such as fix-ups, repairs, improvements, maintenance, taxes, will have to be paid from the IRA account itself. Else, you are making an unauthorized contribution to your IRA assets. In return, any gain from the asset is part of the IRA and tax-deferred.
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Old 03-23-2017, 04:53 PM   #7
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Unlike many here, I'm planning to move to a higher cost area soon. I expect to need to add ~$250k to my existing property proceeds (for a smaller house...).

I have sufficient after-tax funds to pay the extra in cash. If I do that, I will have to pay some capital gains but the tax penalty will be lower that taking the funds from a tax-deferred account like an IRA.

My other option is to take a $250k mortgage. If I do that, I can slowly draw down an IRA to make the monthly payments. I haven't fully decided what I will do yet, but I don't see any other way to handle the transaction. Perhaps I'll learn something from the answers you receive to your question.
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Old 03-23-2017, 05:05 PM   #8
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You can also get a HELOC with the new house, this delays having to put up so much up front. But I avoided all this problem by buying a house before I plan to retire. I knew I would be in a pickle otherwise, and I don't like to be a pickle.
That said there are lenders out there who will work with you in obtaining a loan. I helped my sister with a loan company and she bought her latest house technically on the last day of her temporary job using her 401k/IRA money. She didn't want to sell her house to pay it back but if she did, she would owe no tax.
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Old 03-23-2017, 06:35 PM   #9
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We did the IRA real estate a long time ago. Note, as far as distribution, to my understanding you the person can legally be a partner with you the IRA in ownership of a property. So buy it with the IRA, rent it, upgrade it. When you want to start taking it out, say over five years. Each year get an appraisal. Distribute 20% to you the person as an in kind distribution. (DO the right paperwork, and hope you have a good “custodian”). It should help keep the single year distribution problem in check. Check with your lawyer & CPA.
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Old 03-23-2017, 09:32 PM   #10
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In 2015, I bought a second home (Florida condo), eight years after I retired. I was able to get a 10-year mortgage (at 2.89% interest) with a 30% downpayment. Third Federal Savings & Loan* asked me to provide reasonable paperwork to prove my assets (IRA statements for past 2 yrs, 1040s for 2 yrs., insurance premiums paid for my primary home for 2 yrs, receipts showing that I had paid my real estate taxes for the prior 2 yrs, etc.)

I took the 30% down payment out of my tIRA and and am also paying the monthly mortgage payments with funds from my tIRA. The funds in the tIRA have appreciated more than the 2.89% I've paid on the loan. The condo has also appreciated very nicely in the 2 years I've owned it.

*The young lawyer who handled the closing researched Third Federal (a Cleveland-based bank) and he was rather impressed as to the size and scope of their mortgage business -- financing properties in dozens of states. I appreciated their free pre-approval which made it easy to put in a serious offer and their 60-day rate lock gave me time to shop and negotiate.

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Old 03-23-2017, 09:35 PM   #11
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Quote:
Originally Posted by donk711 View Post
Hi everyone - first time caller, long time listener......I'm wondering if anyone has any thoughts/experiences with purchasing a second home using IRA funds (post-retirement of course!). At retirement I would have funds available to purchase a home for cash, but the tax hit would be substantial if taken out at once. For example purposes, let's say the home in question would be $250k.

Short of phasing out the withdrawls over a period of time (say 5 years), what other strategies would work to limit the tax impact of this type of transaction?

TIA
Buy the second home while you still have earned income and can more easily qualify for a mortgage. Then retire and use IRA withdrawals to make the mortgage payments and additional principal if you wish to.
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Old 03-24-2017, 02:43 AM   #12
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I like the idea of using IRA funds for down payment, and getting a mortgage at today's low rates.
One idea is to take out your down payment money over the Dec./Jan. period. Say you need $50k down. Take $25k Dec. 31 and $25k Jan. 1. It would allow you to use two years of withdrawals while spreading your taxes over two years. You could then use yearly withdrawals to pay down your mortgage if you wanted. I'm not a CPA, but it seems like it would work.

(After Christmas is also a great time to get a deal on real estate-many are a little depressed after the holidays and want to move their property quickly!)
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