Rack-O-Minium in IRA

[Zee]

As most of you are probably aware, a "rack-o-minium" is a boat storage facility where you purchase a boat rack generally in an enclosed or partially enclosed building. They are sold as deeded real estate and owners pay property taxes and a monthly maintenance fee, etc. (kinda like timeshares).

I'm wondering...can a rack-o-minium be purchased as an IRA investment? Some indicate their appreciation should be substantial. And, if so? What are the restrictions on using the rack until it's sold?

Here in SW Florida the market for racks has declined along with housing and investor's that purchased pre-construction are anxious to sell at lower than developer prices during the slowdown. Many simply paid 20% down of a reduced price before construction and no payments were required for 2-3 years (until complete). The RE market has adversely affected resale pricing.

[OldJack]

Prohibited Transaction examples: [ref: thetaxbook, page 13-10]

1. Borrowing money from an IRA.
2. Selling property to an IRA.
3. Receiving unreasonable compensation for managing an IRA.
4. Using an IRA as security for a loan.
5. Buying property for personal use (present or future) with IRA funds.

A prohibited transaction causes the IRA to stop being an IRA as of the first day of the year in which a prohibited transaction occurs. The FMV of the account is treated as a distribution.

I expect your use of the property would be prohibited under item 5 and make the full amount of the IRA taxable.

[Zee]

Prohibited Transaction examples: [ref: thetaxbook, page 13-10]

1. Borrowing money from an IRA.
2. Selling property to an IRA.
3. Receiving unreasonable compensation for managing an IRA.
4. Using an IRA as security for a loan.
5. Buying property for personal use (present or future) with IRA funds.

A prohibited transaction causes the IRA to stop being an IRA as of the first day of the year in which a prohibited transaction occurs. The FMV of the account is treated as a distribution.

I expect your use of the property would be prohibited under item 5 and make the full amount of the IRA taxable.

OK. If purchased for personal use, it's a prohibited transaction. What if the property is purchased pre-construction, and after construction listed with the marina and actively advertised as a rental at FMV, with the intent to hold the purchase until the right market price can be obtained? Clearly (I think), that situation would be ok. What I'm wondering is if the owner uses the property while actively trying to rent or sell, but is willing to vacate immediately for a renter or sale at the right price does that situation disqualify the IRA? I suppose it does, since it would open the door for "abuse".

[jainen]

only 20% down

>>Clearly (I think), that situation would be ok.<<

Not with only 20% down. #4 says you can't use the rack as collateral.

[Zee]

>>Clearly (I think), that situation would be ok.<<

Not with only 20% down. #4 says you can't use the rack as collateral.

Good point! #4 certainly does say that.

What about the second situation? My concern is that this type of transaction would open the door for abuses. But, it does seem kind of wasteful not to use the rack during the interim growth period if there is an honest effort to rent at FMV and renter's can't be found. Again, I don't think a transaction of this nature would stand the test of audit.

[OldJack]

What I'm wondering is if the owner uses the property while actively trying to rent or sell, but is willing to vacate immediately for a renter or sale at the right price does that situation disqualify the IRA? I suppose it does, since it would open the door for "abuse".

I believe that it is clear that if the beneficiary uses it he loses it. Remember, the quote I gave you was only a summary of prohibited transactions. Go to the code for details.

[Zee]

I believe that it is clear that if the beneficiary uses it he loses it. Remember, the quote I gave you was only a summary of prohibited transactions. Go to the code for details.

OK. Thanks. I was just looking for a "quick" affirmation. I had someone ask for some "freebie" advice. I didn't answer, but thought it was an interesting thought. I wouldn't advise anyone to try this, but would anticipate the response, "How would the IRS know, you're using the property?" A good IRS auditor would just ask for the Marina statement and look for personal usage at the Marina (or call them).

[jainen]

what you can get away with

>>How would the IRS know<<

I hear this so often you'd think I'd get used to it. But I still always find it offensive. The taxpayer is asking you to violate your professional ethics for his own benefit.

There are plenty of legitimate tax shelters -- the IRA is itself one of the biggest. It is appropriate to explore what the law allows, but not what you can get away with.

[George Boutwell]

Wrong

>>Clearly (I think), that situation would be ok.<<

Not with only 20% down. #4 says you can't use the rack as collateral.

#4 says you can't use an IRA as collateral. There is no prohibition on an IRA owning mortgage property.