Condo Owned by an IRA
I have not thought it a good idea to own real estate in one’s IRA, but I wonder if my clients’ situation might be an exception. At 73 and 71 respectively, James and his wife, Vicky are in good health, but are thinking that they would like to move from their current home to a condo where they won’t have a lawn to take care of and no Colorado snow to shovel–just not yet. They have been thinking that they would find a unit that they like, buy it now, and rent it for two or three years. They have sufficient assets to buy the property outright either using money from non-qualified accounts or from James’ IRA. They’re guessing that they would pay about $500K for the property.
If they took money from non-qualified accounts, it would require selling holdings that would generate significant capital gains. That made me think about using IRA money. There is a local IRA custodian that would allow for owning an individual piece of real estate in an IRA. I’ve been brainstorming about whether, given the short time that they would be renting the condo, it would be advisable to have James’ IRA to own the property. If the property costs $500K, it would seem to me that one would want to move $50K to $100K of additional cash to cover any needed repairs and to remodel the condo before they move in.
If James and Vicky went this route, would they be able to buy the home from the IRA when they’re ready to move in or is this a hair-brained idea? What might I be overlooking?
Permalink Submitted by Alan - IRA critic on Wed, 2017-08-23 23:23
Not a fan of this idea for only 3 years. Too much hassle considering all the issues. Further, due to the disaster and exposure of prohibited transactions, for a self directed IRA custodian one of the proven national leaders would be preferable. No telling whether the local firm measures up, but the average person using a SD IRA needs to think and inquire before doing any of the things that they would ordinarily do with rental real estate. The SD IRA custodian must also establish and report the year end value of the property to the IRS and flag it on Form 5498 as a real estate IRA. An appraisal is typically required every so often, perhaps not every year. RMDs are still due although they can be aggregated with other non SD IRA accounts he has. All work must be contracted as he can not personally do anything since he is a “disqualified person” with respect to his IRA property. Also, does he really want to deal with tenants, evictions, etc at this stage of life? Finally, I think if he does want to convert the property to occupancy, he would simply distribute the property out of his IRA, a taxable distribution but would cover his RMD for that year. This would be done prior to any remodeling, since any remodeling would be for personal use purposes. He is also forfeiting the common tax benefits of taxable rental property, the depreciation write offs, costs of insurance, repairs etc. as long as his IRA owns the property.