Invest IRA Funds in Real Estate?

[zeros]

Is it possible to invest in real estate property with IRA funds? I thought I heard about this but can't remember.

[taxmandan]

Yes, but....

you have to find an IRA account firm willing to work with you, if you are wanting to manage it yourself. And, IRA owner has to meet strict arms-length rules, can't trasnfer to the IRA any property they currently own.

[Burke]

See Pub 590, page 47 for Prohibited Transactions. Can't sell property to an IRA, can't buy property for personal use, can't use funds as collateral, etc. It can be done and there are people out there who will charge you to attend seminars as to how, but it has to be a cash transaction, which kills a lot of interest, no mortgage. And it would have to be a self-directed IRA.

[joanmcq]

Yep, I had some clients that were talked into doing the self-directed IRA thing for real estate & called me only to figure out the tax bite after they discovered they couldn't get a mortgage.

If they had waited a bit and then consulted me (real estate maven) I could've directed me to properties in my neighborhood that they could have bought for cash and rented for the same amount as the condos they bought that don't have rents that cover the mortgages.

[DaveO]

You can have a mortgage it just needs to be non-recourse as you can't pledge IRA assets for a loan. I have one client doing this after my most earnest advice not to. I'll be surprised if it doesn't blow up and disqualify his IRA before he has a chance to retire.

[Lion]

Cash Flow

And the IRA has to handle the cash flow independent of the IRA owner; you can't just put in some extra money to meet bill payments such as a mortgage payment. It's not for the faint of heart.

[JoshinNC]

Just use a REIT

or private placement limited partnership. VERY GOOD yields (8-9%+) and no self dealing problems.

[AuditorTurnedGood]

I had a client use a self directed IRA to purchase property in partnership with another client's Family Limited Partnership - ugh (they did this transaction before hiring me, and against the advice of the other 2 accountants that came before me). The FLP held the mortgage so it could still be recourse, the IRA provided down money and was in title on the property - what a disaster. Having that IRA involved simply complicated matters when the property was sold. I have clients since that have asked if they should use one, and my answer is to tell them fine, but you'll need another accountant.

p.s. At the end of the day it ended up not mattering - the property was in South Florida and purchased in 2001, sold in 2006, so they lost their ***, and the IRA client liquidated his IRA in 2008 to pay off crushing business debt, paying the 10% penalty along the way. A horse apiece, I suppose.

ATG

[JohnH]

Well, I learned something new today. Although the context made it clear what you meant, I had never heard the term "a horse apiece" so I looked it up. Even knowing what it meant, I would have never dreamed it came from a dice game.