IRA Real Estate LLC
It appears an IRA can “own” Real Estate if the Custodian permits. Would an IRA utilizing IRA funds purchase a residence with the intent of remodeling the property and reselling it be subject to “Unrelated Business Income”? If so, what is the impact of taxes to the IRA on a ny gain? Thank you. Lou Oberman
Permalink Submitted by mk foss on Sat, 2010-07-17 03:03
Improving a purchased house and selling it is likely to generate unrelated business income tax. An individual doing the same thing would recognize ordinary business income on such an activity – and self-employment tax because it appears that the house is more like an inventory asset than an asset held for appreciation. UBIT applies to the gain – reduced by $1,000. The tax rates are those of trusts where you hit the 35% bracket (this year) at $11,200. The tax would come from the IRA. This is double taxation because the IRA owner would pay tax on all withdrawals from the IRA at ordinary rates as well.
I think a bigger risk is prohibited transactions. The IRA could be disqualified if there are activities that are considered prohibited. Paying any of the IRA expenses directly, compensating a related project manager or sales agent are examples of troubling items. The IRA owner would be a disqualified person – would the custodian sign contracts, deal with mechanics liens, hire laborers? There are many things that could go wrong.
Permalink Submitted by Daniel Liddle on Sat, 2010-07-17 14:42
Your IRA purchases the property. Next the IRA pays a contractor to do the repairs. This doesn’t trigger anything. Hopefully your IRA makes a profit. For some unexplained reason there seems to be a built in bias against having real estate in one’s IRA on this forum. There should be a bias against the bankster Wall St. crowd who steal your IRA, pensions,savings….
Permalink Submitted by Jose Morales on Mon, 2010-07-19 23:52
[quote=”[email protected]“]Your IRA purchases the property. Next the IRA pays a contractor to do the repairs. This doesn’t trigger anything. Hopefully your IRA makes a profit. For some unexplained reason there seems to be a built in bias against having real estate in one’s IRA on this forum. There should be a bias against the bankster Wall St. crowd who steal your IRA, pensions,savings….[/quote]
The perceived bias againsed having real estate in one’s IRA may be becasue this is not a forum to extoll the greatness of one investment option over another. If someone wants advise on investment options they should seek out the cousel of a financial planner, or someone along those lines. Many of the people here offer their assistance in the form of trying to make the oftentimes confusing IRS regulations either easier to understand or more apparent when it seems they are being overlooked. It would be a disservice to cheer someone on into the world of non-traditional IRA investments without fully disclosing the pitfalls and complications, especially when it is apparent that the individual lacks a sophisticated understanding of the basic rules that those investments would be subject to.
Permalink Submitted by Alan Spross on Tue, 2010-07-20 00:06
I agree. For example, I am aware of some of the pitfalls, but certainly not all of them. I hesitate to expound on the issue when I might overlook a major pitfall. The repository of most complete info not only on prohibited transactions, UBIT, etc is with the few large IRA custodians who specialize in “self directed IRAs”. Not only have these custodians been dealing with non traditional investments for many years, but they also are more aware of IRS inquiries and enforcement policy for these investments and how IRS policy is evolving.
You have to weigh the benefit of their greater information and experience vrs the vested interest they have in promoting the use of such investments.
Permalink Submitted by Patti Frazier on Sat, 2010-07-24 23:00
I have also been investigating holding real estate in my ROTH. it is far more complicated than it appears on its face but it seems if you use it for rental income and appreciation, it could work. Any comments? Thanks.