Permalink Submitted by Alan Spross on Wed, 2010-11-17 21:10
There are many complex issues to deal with, the most critical being to avoid prohibited transactions that would result in your IRA being disqualified and distributed as a taxable event. IRA custodians such as Pensco and Guidant specialize in self directed IRAs (IRAs holding real estate and alternative investments) and can provide you with plenty of information to digest prior to transferring all or part of your IRA to them as custodian. If your IRA owns real estate, you forego the various tax advantages of real estate such as depreciation and the lower LT cap gain rate on appreciation. There is also an annual IRA valuation requirement and avoiding the costs of annual appraisals should be pursued if you can. You can google self directed IRA or the custodians named above for more detailed information.
alan, I was not aware there was a reduced cap gains tax rate on real estate. Could you post a few words of explanation on that…? (I assume you’re not referring to the 500K exemption on homes….)
Permalink Submitted by Alan Spross on Wed, 2010-11-17 23:44
Right. And you cannot own any personal use property in an IRA anyway as that is one of the prohibited transactions. Most relatives also cannot live in the property as they are disqualified persons with respect to the IRA. Some people buy rentals in their IRA and if and when the rental is sold the gains would be long term if the property is not in an IRA. Of course, we are in a cycle of losses instead of gains in most markets, so right now this is not much of an issue. Rental income is ordinary income so that is also not much of an issue.
But once any investment including real estate is placed in an IRA, the IRA tax rules totally erase the tax rules that would apply to the investment outside the IRA, and real estate has traditionally produced many tax preferences.
Permalink Submitted by mk foss on Sat, 2010-11-20 02:33
When an indidivual sells rental real estate – currently the tax rate is 15% on the true appreciation and 25% on the gain attributable to depreciation claimed. Also if the operation of the rental had created passive loss carryovers, those would be deductible in full in the year of sale at the person’s hightest tax rate. Usually 28% or greater.
The profit from real estate in an IRA just adds to the value that must eventaully be distributed and taxed at the person’s marginal tax bracket – usually 25% or higher.
Even if someone is careful, you can make mistakes dealing with real estate in an IRA that could be a prohibtied transaction. For example, what if a tenant needed an emergency repair and the IRA owner paid for it personally. That’s a prohibited transaction and there would be another prohibited trnasaction if the IRA reimbursed the repair.
Permalink Submitted by Daniel Liddle on Mon, 2010-11-22 18:34
The sky is falling. The sky is falling……. I never hear about people who have actually done Real Estate in their IRA on this forum. If your IRA is a Roth and you know a good deal when you see one this a great way to go. I could tell everyone what evilness lurks on Wall Street. Watch out a lot of people could screw you on Wall St.-but after this last go around on this recession you would think more people would be scared of losing 25-50% of everything they had invested in their IRA or elsewhere in the market. When I make a mistake in my IRA(just had my first loss this year) I can live with it. But when trusted brokers lose your money they’ll say that ” stocks go up and stocks go down”.
Permalink Submitted by Alan Spross on Mon, 2010-11-22 20:40
If you do want to pursue real estate in your IRA, I agree that a Roth IRA works better than a traditional IRA. First, there are no RMDs which must be funded, and when the Roth is qualified all distributions are tax free. Therefore you are not changing LT gains into ordinary income as you would in a TIRA.
Permalink Submitted by John Clark on Wed, 2010-11-24 20:08
During your life, Real Estate in an IRA or Roth IRA is complex. Sadly if you die and your IRA or Roth has real estate, there are ditribution requirements. If there are not benficiaries named, as most of these don’t, it ends up in the estate with a nightmare of tax conditons following. Try explaining no step up in basis to a spouse. I pray your E/O coverage is paid up!
John
Permalink Submitted by Alan Spross on Wed, 2010-11-17 21:10
There are many complex issues to deal with, the most critical being to avoid prohibited transactions that would result in your IRA being disqualified and distributed as a taxable event. IRA custodians such as Pensco and Guidant specialize in self directed IRAs (IRAs holding real estate and alternative investments) and can provide you with plenty of information to digest prior to transferring all or part of your IRA to them as custodian. If your IRA owns real estate, you forego the various tax advantages of real estate such as depreciation and the lower LT cap gain rate on appreciation. There is also an annual IRA valuation requirement and avoiding the costs of annual appraisals should be pursued if you can. You can google self directed IRA or the custodians named above for more detailed information.
Permalink Submitted by [email protected] on Wed, 2010-11-17 23:34
>
alan, I was not aware there was a reduced cap gains tax rate on real estate. Could you post a few words of explanation on that…? (I assume you’re not referring to the 500K exemption on homes….)
Thanks,
gerry.
Permalink Submitted by Alan Spross on Wed, 2010-11-17 23:44
Right. And you cannot own any personal use property in an IRA anyway as that is one of the prohibited transactions. Most relatives also cannot live in the property as they are disqualified persons with respect to the IRA. Some people buy rentals in their IRA and if and when the rental is sold the gains would be long term if the property is not in an IRA. Of course, we are in a cycle of losses instead of gains in most markets, so right now this is not much of an issue. Rental income is ordinary income so that is also not much of an issue.
But once any investment including real estate is placed in an IRA, the IRA tax rules totally erase the tax rules that would apply to the investment outside the IRA, and real estate has traditionally produced many tax preferences.
Permalink Submitted by mk foss on Sat, 2010-11-20 02:33
When an indidivual sells rental real estate – currently the tax rate is 15% on the true appreciation and 25% on the gain attributable to depreciation claimed. Also if the operation of the rental had created passive loss carryovers, those would be deductible in full in the year of sale at the person’s hightest tax rate. Usually 28% or greater.
The profit from real estate in an IRA just adds to the value that must eventaully be distributed and taxed at the person’s marginal tax bracket – usually 25% or higher.
Even if someone is careful, you can make mistakes dealing with real estate in an IRA that could be a prohibtied transaction. For example, what if a tenant needed an emergency repair and the IRA owner paid for it personally. That’s a prohibited transaction and there would be another prohibited trnasaction if the IRA reimbursed the repair.
Permalink Submitted by Daniel Liddle on Mon, 2010-11-22 18:34
The sky is falling. The sky is falling……. I never hear about people who have actually done Real Estate in their IRA on this forum. If your IRA is a Roth and you know a good deal when you see one this a great way to go. I could tell everyone what evilness lurks on Wall Street. Watch out a lot of people could screw you on Wall St.-but after this last go around on this recession you would think more people would be scared of losing 25-50% of everything they had invested in their IRA or elsewhere in the market. When I make a mistake in my IRA(just had my first loss this year) I can live with it. But when trusted brokers lose your money they’ll say that ” stocks go up and stocks go down”.
Permalink Submitted by Alan Spross on Mon, 2010-11-22 20:40
If you do want to pursue real estate in your IRA, I agree that a Roth IRA works better than a traditional IRA. First, there are no RMDs which must be funded, and when the Roth is qualified all distributions are tax free. Therefore you are not changing LT gains into ordinary income as you would in a TIRA.
Permalink Submitted by John Clark on Wed, 2010-11-24 20:08
During your life, Real Estate in an IRA or Roth IRA is complex. Sadly if you die and your IRA or Roth has real estate, there are ditribution requirements. If there are not benficiaries named, as most of these don’t, it ends up in the estate with a nightmare of tax conditons following. Try explaining no step up in basis to a spouse. I pray your E/O coverage is paid up!
John