Traditional Beneficiary IRA
Hello,
My name is Julie with the age of 45, I have 2 young children ages 12 & 9. I am working full time as an eligiblity worker for the City & Count of San Francisco. I am currently own 2 properties in SF (a home & a commercial property), I am planning to buy another home investment property by using the funds available in my Traditional Beneficiary IRA. I am hoping to get your tax advise & what best action to take. My annual income is at around $100 thousand (salary plus rental income & other home base businesses). Please let me know if you need additinal information, thanks!
Permalink Submitted by Alan Spross on Mon, 2012-08-06 20:04
It is not clear whether you should use IRA funds to purchase real estate, although if done correctly you could do so.
Here are some things you should do or consider if you plan to do this:
1) Directly transfer the funds to a self directed IRA custodian such as Pensco or Guidant. There will be fees, but using these firms helps you avoid prohibited transactions using your IRA. The rules are difficult to understand and the IRS is looking very closely at IRAs used for this purpose.
2) You have an inherited IRA and you must take RMDs every year from this account. Therefore you should retain a cash buffer to fund your RMDs and also for emergency needs emanating from the property. Note that all expenses must be paid out of this IRA account, you cannot pay them from your other funds as that would be one of the prohibited transactions. Therefore you will need cash from the IRA for property taxes, repairs, insurance etc on this property.
3) By using your IRA for this purpose, you are converting depreciation and capital gains tax breaks into ordinary income which is taxed at a higher rate. The gains from your rents or property appreciation will eventually be distributed as RMDs or additional amounts and taxed at full ordinary income rates.
4) The IRA custodian must provide both you and the IRS will a year end valuation for your IRA, and that will mean the expense of an occasional appraisal of the property value. As it rises, your RMD amount will also rise due to the increased value and your lower divisor for RMDs (divisor is reduced by 1.0 each successive year).
Here is a detailed article on IRA prohibited transactions:
http://www.journalofaccountancy.com/Issues/2000/Apr/TheDosAndDonTsOfIraI…
Permalink Submitted by Bruce Steiner on Mon, 2012-08-06 20:21
It isn’t that you’re converting capital gains to ordinary income in the IRA. The best way to look at an IRA is that it’s part yours and part the government’s, and the income and gains on your share of the IRA are tax-free. The tax consequences are the same regardless of how the IRA is invested. Unless your taxable account is already invested entirely in real estate, what you’re giving up by putting into an IRA investments with favorable tax treatment when held in a taxable account is the tax benefits you would otherwise get when holding those investments in your taxable account.