self directed ira idea
I have been reading about self directed ira’s and I would like to set one up, Im young, 27 and so far have used every penny I have to grow my business and my real estate holdings so I dont have much in the way of a retirment account. I have been looking for a couple of apartment buildings and have found 2 that I like, for todays purposes lets say they are $100,000 each, it just so happens that they are owned by the same person what I would like to do is open a roth ira thats self directed and place $4500 into the account, the max I can contribute for this year. I would then like to buy one of the buildings for $4500 through my new roth ira account and then pay $195500 for the other one. It would be an all cash transasction so I dont need to worrie about apraisers or any thing like that. Since any gains I would see if I sold the one in my ira would be tax free It wouldnt matter what my basis was in the property in terms of cap gains and on the other building that I paid the 195500 for would give me a large loss for tax purposes in both yearly rental income or if sold cap gains. It wouldnt change the property taxes as that is what the county has it peged at any way.
My questions are
are there any regulations prohibiting such a transaction?
Dose any one see a down side to what I am proposing?
I just found this site tonight and appericate your help
Thanks
Ryan
Permalink Submitted by Alan Spross on Tue, 2010-07-13 04:29
Not only is this a bad idea, it is tantamount to tax fraud. You propose to acquire an asset for your IRA at an artificially depressed price of less than 5% of it’s true value, while simultaneously establishing an inflated tax basis for your taxable account on which to take cap losses.
Your IRA custodian also knows that they must report the fair market value of all IRA holdings at the end of each year. They must determine that value with an actual appraisal if necessary. This value is reported to both you and the IRS on Form 5498. If the IRA custodian does not adhere to the rules required of IRA custodians, they could be suspended from performing such duties. Therefore, even if an IRA owner endeavored to carry out such a scheme, it would not get past the IRA custodian, and this is of course preferable to having the IRS discover this at a later date and levy severe penalties. And if the seller is related to you, the seller may also be what is considered a “disqualified person” with respect to your IRA.
While the attached link does not address your idea directly, it does give you an idea of some of the pitfalls of using your IRA to hold real estate. You can also sometimes get assistance from the few specialized self directed IRA custodians that will allow real estate in an IRA. But remember that by holding RE in an IRA you give up some of the tax preferences such as lower LT cap gain rates and depreciation that applies to RE held outside a retirement account.
http://www.aba.com/NR/rdonlyres/D8BE9599-E5ED-4994-91CB-BF8B23A2AE7C/429…
Permalink Submitted by ryan scritchlow on Tue, 2010-07-13 21:32
Thank for for that link it was extreamyl help full I hadnt found any thing any where explaing the down side to purchaseing real estate in an ira, Do you have any more information on the negitives? after reading it I was a bit confused If you held your real estate in an llc that the ira owned as for the year end valuation wouldnt in stead of haveing to have an apraisal done of each property wouldnt my accountent be able to value the business each year at years end based on rents recieved like appraisers do to when they apraise a rental property?
Permalink Submitted by Alan Spross on Tue, 2010-07-13 22:32
The IRA custodian will apply their own guidelines regarding the year end valuation requirement. They may or may not require an appraisal every year, but generally are not allowed to use property tax assessments to determine value because those vary so much between taxing jurisdictions. To get specific information, you need to ask the IRA custodian how they will determine the value and whether the method they use needs to be developed from new data every year or not, and whether the rental income method can be used.
Permalink Submitted by Mel Wheeler on Tue, 2010-09-21 19:11
I am looking at both a Self Directed IRA custodian and a Self Directed Checkbook IRA/LLC. In my discussions with companies like Pensco.com, http://www.selfdirectediragroup.com and Entrust.com I have been told with an LLC you are not required to get an appraisal each year because the investment the custodian is holding is the member units of the LLC and not the real estate. Am I understanding this correctly?
Thanks in advance
Mel
Permalink Submitted by Daniel Liddle on Wed, 2010-09-22 12:59
If you are trying to get more money in a retirement account fast- perhaps a 401K For One would be the ticket???
Permalink Submitted by mk foss on Wed, 2010-09-22 16:54
The custodian has to report FMV of all IRAs to IRS on an annual basis. When they are reporing LLC units they need some basis for valuation – it may not be an appraisal of the real estate within the LLC but that seems to be the best measure of the value. Did they tell you how they report the value of the LLC units?