Self-Directed IRA (Rental Property)

[SFBOB]

Yes, You can hold real estate in an IRA

I have a client that is very pleased with his relationship with Peter Kamel at Equity Trust in Elyria Ohio. Elyria is about 25 miles from Cleveland. I just finished talking to Peter and got his permissiom to post his phone number. 1-888-382-4727 Ex 348
This is not to solict business. A chance to get the questions answered.

[Roberts]

It used to be that the IRS said NO REAL ESTATE and then about 10+ years ago we received a prospectus from a company that said they had figured out a way to invest in real estate. As I understood it, you had to invest in a trust (something like that) where pools of individuals were collected together and invested in the partnership on a limited liability issue. There are multiple problems with real estate (several mentioned) plus the fact that if you own the property in an IRA and you need to make renovations, how do you do it if all the money is invested? Need to rehab the kitchen, how ya going to pay for it? If you work on the property and build sweat equity, the IRS is going to have a problem with it because you've added value beyond your contribution limit.

Even with all the problems, people still advertise you can do it but it's a nightmare from what I've heard.

[Burke]

How would the value of the IRA be set on Dec. 31st each year. Would they have to pay for an appraisal each year?

And that's another good question!

[SFBOB]

Rental Income to satisfy MRD

The MRD would have to come from the rental income and a reserve set up at the get go to cover this situation.Google Self Directed IRA's. Most are happy to talk if they think they can land you as a client.

[WhiteOleander]

How would the value of the IRA be set on Dec. 31st each year. Would they have to pay for an appraisal each year?

[JG EA]

Another thought. If all the liguid assests of the IRA are used to purchase the house, what will the owner use for RMDs if they become necessary?

Right! They would have to liquidate.

[WhiteOleander]

Another thought. If all the liguid assests of the IRA are used to purchase the house, what will the owner use for RMDs if they become necessary?

[Burke]

And that is the BIG deterrent for holding real estate in the IRA. The IRA account must purchase the real estate with its own funds and pay cash for it. If it borrows the money, its a prohibited transaction and disqualifies the IRA.

[DaveO]

Another problem is the fact only cash can be contributed to the IRA. This means all the money to purchase the property must be in the IRA already otherwise non-recourse financing would be necessary.

[BOB W]

I found this very interesting, especially in others areas not related to to rental issues.

"Real estate rental income generally is exempt from UBTI, but becomes UBTI if the amount of rent is computed as a percentage of the tenant's profits."

Seems like it relates to Commercial Property for UBTI but not for residential property.

http://www.investorsinsight.com/blogs/retirement_watch/archive/2009/04/03/dos-and-don-ts-of-ira-investing.aspx

[Bees Knees]

But, since the property creates income as it goes along, the IRA has to account for that just as an individual would.

Just a slight clarification. IRAs can make money and not pay tax (interest, dividends, capital gains, etc). Unrelated Business Income tax applies to making money as a trade or business. A tax-exempt entity, such as a charity or an IRA has to pay income tax when it earns unrelated business income. The idea is that a tax-exempt entity would have an unfair competitive advantage over a tax paying business if the tax-exempt entity could earn trade or business income without paying tax on it.

The question I have for rental property is whether or not rental real estate falls into the category of trade or business income for purposes of the UBI rules, or whether it is considered investment income not subject to UBI tax. I would suggest looking that up before considering whether or not UBI is a deterrent to putting real estate into an IRA.

Regardless of whether it is or not subject to UBI tax, holding real estate in an IRA is something not many IRA trustees would be willing to do. That is the key – finding an IRA trustee willing to do it.

[WhiteOleander]

I thought whatever happens in an IRA stays in an IRA until monies are distributed..?? Why would a tax return have to be filed for the rental issue?

Bob, the IRA would have to file the tax return as "UBI" unrealted business income. It has to report the rental income and deductions and perhaps even eventually the sale of the property. Otherwise, the IRA would accumulate gross rent income with no tax paid on it. The IRS sees this as tax evasion.

So, if the IRA purchased the property and just held it until it appreciated and then sold it, it would not be as difficult as receiving income on the property. It would be similar to the IRA buying stock and later selling at a gain. But, since the property creates income as it goes along, the IRA has to account for that just as an individual would.

[Edsel]

IRA Administrators

The consensus was that it was difficult to find an administrator to run the IRA. The IRA would have to file a tax return and be responsible for paying taxes, repair bills, etc. That's more than most want to get involved with.

Yes, when you get away from cash, no one seems to want to handle it. Especially an independent party. No shortage of finding IRA Administrators to babysit your cash, though. Three cheers for the good job they are doing -- failing to make RMDs, triple the fees of a conventional brokerage account, messing up 1099-Rs, skimming off the top of mutual funds, etc. Hard to do all this stuff with a piece of real estate.

Oleander, you should feel gratified that John considers you more knowledgeable than your barbers' postman's pet groomer. Don't be intimidated by being placed on such a high pedestal...

[JohnH]

I appreciate all the input. Bob, thanks for that lead. I think I'll call them when I get back from the Easter break & ask for their thoughts.

[SFBOB]

Sorry the phone number is

Quidant Financial 1-888-472-4455