Setting up Roth at age 85 for rental property

Submitted by Tariq Albazzaz on Wed, 2018-11-28 21:21

Hi,

My grandmother has been in a nursing home for a bit now, and we’re still looking to manage her assets better to earn her income to cover the cost of care. Currently, she’s burning her savings down a bit, which is fine at her age, but she would rather cover her costs, and I currently have a few other properties I manage. She’s closing on a property next month, and we’re currently trying to figure out the best way to maximize her income. I have already registered an LLC in the state of Georgia for her.

My question is this: is there some way we can setup a Roth IRA for her, put all the closing funds into it, then purchase the property through the LLC and have it in the IRA, with this allowing her to not have both rental income and capital gains taxes?

Thanks



Submitted by William Tuttle on Thu, 2018-11-29 00:34

Rental income is reported on Schedule E. Both rental income and capital gains are passive income not compensation.

Submitted by Alan - IRA critic on Thu, 2018-11-29 01:45

She does not have compensation, but let’s say she has a large enough TIRA (no Roth yet) to fund the purchase of this property. If she wanted the rental income and cap gains to be non taxable when distributed from the Roth IRA, she would have to first convert the TIRA to a Roth IRA, would owe ordinary income tax on the conversion and could then have the net rental income retained in the Roth IRA or even distributed from the Roth IRA tax free since amounts up to the conversion amount would be distributed first from the Roth tax free and before any Roth earnings.  The prohibited transaction exposures of owning real estate in an IRA would have to be avoided, and there would be one such prohibited transaction right out of the gate.  As the property manager of the property, with you being a lineal descendant of your grandmother, a prohibited transaction would occur since a lineal descendant is a disqualified person with respect to providing services for the property. Therefore, your gm would have to find another property manager for the property before her IRA purchased it. This is just one pitfall with respect to owning real estate in an IRA.

Submitted by Tariq Albazzaz on Thu, 2018-11-29 02:20

She doesn’t have a traditional IRA, and she can’t open one now because of her age, right?  What about having a property management company (LLC) and having herself as property manager to be earned income?  It’s not only this property, but her old house that is she is going to rent out.  She also wants to get another property later, pending that this all goes well.  I’m not trying to suggest this to simply get around it illegitimately – she wants to work, and I think managing some contractors and collecting rent will keep her somewhat busy, especially if she gets a 3rd property.  In that case, wouldn’t it be earned income and not passive?

Submitted by William Tuttle on Thu, 2018-11-29 15:42

Keep in mind that she will have to pay 15.3% SE taxes on the rental income even if a property management company could be justified. Which is unlikely because:

  • She is in a nursing home.
  • She has no history of earned income as a property manager.
  • The LLC or any other leegal entity type is irrelevant.
  • You can not just decide you have a property management company. The IRS is very aware of this dodge and has written specific regulations in 26 CFR 1.183-2 – Activity not engaged in for profit defined.
  • (a) In general. For purposes of section 183 and the regulations thereunder, the term activity not engaged in for profit means any activity other than one with respect to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212.
  • (b) Relevant factors. In determining whether an activity is engaged in for profit, all facts and circumstances with respect to the activity are to be taken into account.
  • (1) Manner in which the taxpayer carries on the activity.
  • (2) The expertise of the taxpayer or his advisors.
  • (3) The time and effort expended by the taxpayer in carrying on the activity
  • (4) Expectation that assets used in activity may appreciate in value.
  • (5) The success of the taxpayer in carrying on other similar or dissimilar activities.
  • (6) The taxpayer’s history of income or losses with respect to the activity.
  • (7) The amount of occasional profits, if any, which are earned.
  • (8) The financial status of the taxpayer.
  • (9) Elements of personal pleasure or recreation.

Submitted by Tariq Albazzaz on Fri, 2018-11-30 00:12

Oh well…thank you all for your help!!  We’ll just put the LLC filing on her Schedule E and write off what we can.Thanks!

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