Purchase real estate with Roth and TIRA as % owners
A person told me she wants to buy a condo with her IRA but she doesn’t have enough without using both the Roth and the TIRA. She also doesn’t have the money to convert TIRA to Roth.
She talked with Equity Trust and they said that they can have both the Roth and the TIRA each buy a share in the property and the Roth and the TIRA will be co-owners.
Any land mines or problems with doing that?
Thanks in advance,
Lee
Permalink Submitted by Alan Spross on Tue, 2011-11-29 23:19
Lee,
The entire concept could be considered a land mine due to prohibited transaction exposures, but a professional custodian can help avoid the pitfalls. Using two types of IRAs as co owners only means that each type will have to fund the required expenses for it’s share. For example, if there are expensive repair bills, one IRA cannot cover the obligation of the other IRA. If the IRA owner commits a prohibited transaction such as letting a family member move into the condo, it will result in distribution of both IRAs. If that happens, the tax bill on the Roth will obviously be less.
This is obviously a rental condo, and liquidity is probably the main challenge. For example, the condo Assn might levy a large assessment and the IRAs must hold enough cash to satisfy such demands.
Permalink Submitted by Jose Morales on Wed, 2011-11-30 16:43
If she doesn’t have enough in either a Traditional or Roth IRA to purchase the property then it sounds like she will most likely exhaust all funds in both to purchase the property. If that is the case then this person will be in a very tight spot when there are expenses incurred with the property. As Alan pointed out, each IRA will need to take care of it’s own percentage of expenses, and therefore must have enough liquidity somewhere to cover those expenses. The IRA owner would not be able to cover those expenses out of pocket on behalf of the IRAs.
Permalink Submitted by Lee Martinson on Wed, 2011-11-30 22:56
I don’t think it’s the greatest decision but it’s what she wants to do. Real estate is what she knows.
She will be reserving a lot of cash in the IRA to handle expenses.
One other thing I’m wondering: How would the rent check be paid? I think she wants to take each rent check as a distribution. But would the renter have to make out two rent checks, one for each IRA? And who would the rent checks be payable to, each IRA?
I asked the custodian who will handle this and they seemed to think they renter could just pay one check to her and then she could make two checks and pay it to the custodian who could then turn around and pay out to her so it looks like the proper thing for the IRS. Sounds pretty screwy to me. Any thoughts Alan?
Lee
Permalink Submitted by Alan Spross on Wed, 2011-11-30 23:26
I will defer that question to the self directed custodian. This is their total business and they deal with questions like this daily. They are also among the first to know of IRS inquiries and the types of things that are likely to trigger prohibited transactions. If the IRA is considered distributed by the IRS, these people lose business and reputation.