holding real-estate inside an IRA
What are the issues pertaining to owning real-estate- single family rental -inside an IRA.
I’m interested in the full spectrum of issues from the initial purchase and how to best do this, custodial considerations, annual reporting, future RMD’s, and disposition of the property in the future either by outright sale while the IRA owner is alive or when a beneficiary inherits at his death. I understand its very complicated and they will ultimately need to seek a competent tax advisor to initially guide them and provide ongoing monitoring and or reporting. Thanks
Permalink Submitted by Alan - IRA critic on Tue, 2017-03-21 17:59
You can probably get some detailed information from one of the larger self directed IRA custodians. There is too much detail to try and explain here. But the self directed IRA account holding the rental property needs to have a sufficient cash balance to pay all the associated expenses of the property including prop taxes, repairs, legal costs, etc. When RMDs begin, having an acceptable method of determining the annual year end value of the property will be necessary, so the custodian should be asked how often the IRA will have to pay for an appraisal out of the IRA account. The other critical issue is to avoid prohibited transactions with respect to the property. The IRA owner cannot perform repairs personally and cannot use the property for personal use. A prohibited transaction results in the IRA losing IRA status and a taxable distribution results on Jan 1st of the year the prohibited transaction occurred. Finally, when you purchase rental property in your IRA, you lose the tax benefit of writing off depreciation and other expenses that you would have if you held the property outside a retirement account. Again, the SD IRA custodian can provide information regarding this and the large ones have years of experience in this area and know the pitfalls.
Permalink Submitted by Robert J Andreola Jr on Tue, 2017-03-21 19:08
thank you. Whre might i get some comprehenive written resource reference material that is easy to follow regarding nuances?Any well known custodians that you can refer me to that twould have the requisite experience?How important is a the tax professional advisor for a situations like this?
Permalink Submitted by Alan - IRA critic on Tue, 2017-03-21 19:24
Some of the major ones who have been doing this for years include Equity Trust, Entrust, Guidant, and New Direction. You can check their websites for education information, then call them and see if they can send you more detailed literature. As for a tax professional, since this is an IRA investment you actually eliminate annual Sch E filing, depreciation etc. The typical tax professional knows nothing about prohibited transactions and disqualified persons with respect to your IRA, and you are likely to get better guidance from these custodians on what you can do and what you cannot do. They have a vested interest in keeping your business and not involving the IRS. They have the experience to know what the IRS positions are on related matters. A real estate professional may also be helpful since your IRA must purchase the property. You cannot place a property you already own in the self directed IRA. As for RMDs, it is preferable not to have your entire IRA in real estate. You should have other IRAs that can be used to satisfy the RMDs, without the liquidity challenges of real estate comprising your entire IRA balance. You don’t want ot get into the situation, where you have to deed a portion of the property to yourself to satisfy the RMD as that sets up other challenges. SImple is better.