Can I Buy Real Estate with my IRA?

Question: I recently read about using an IRA to own real estate. I am very interested in taking money in my IRA and buying a rental property. Do you have to have a specific kind of IRA? What are the pros and cons of this strategy? L.B.
Answer: It is possible to own rental properties in your IRA and a lot of people do this. However, it generally cannot be done through a traditional brokerage firm or bank. You’ll have to open up a self-directed IRA account with a firm that specializes in custody of these types of ‘private’ investments (Google: Self-Directed IRA). The obvious advantage of holding assets in an IRA is that all income and gains will be tax deferred until you choose to make withdrawals. Owning real estate inside an IRA can have some disadvantages including:
· Depreciation tax benefits lost. One of the big benefits of owning rental real estate is that you get to depreciate the building and equipment. This benefit is lost when the real estate is held in an IRA.
· Interest deduction is lost. If you have a mortgage on the property, your interest payments are not deductible.
· Converts capital gains into ordinary income. Another advantage of owning rental real estate outside an IRA is that profits from a sale are treated as long-term capital gains, typically taxed at a maximum federal rate of 15%. Any gains from a sale of your property held inside your IRA will eventually come out as ordinary income.
In addition, there are a number of prohibited transactions. For example, you cannot buy a beach home for rental and also use the home personally. This goes for both you and family members. If you get a mortgage on the property, you cannot personally guarantee the loan.
Perhaps the best strategy for dealing in real estate inside your IRA might be to act as a lender where you hold a mortgage with the real estate as security for the loan. This way you don’t give up any of the tax benefits and the interest payments to you, which normally would be taxed at ordinary income rates, will be tax deferred.
Be sure you fully understand the fees charged by the custodian and remember that all expenses related to the property must be paid from your IRA so you’ll need to be certain that you have the necessary cash to pay unexpected bills.
Question: If I want to make a sizeable transfer to a Roth have you seen cases where a bank would loan for the taxes? B.M.
Answer: Wow! Now this is a question I have never been asked before! And no, I’ve never heard of someone taking out a bank loan to pay the taxes on a Roth IRA conversion but that does not mean it’s not possible. You could not put up your Roth as collateral for the loan but assuming the bank would give you a signature loan or accept other collateral, there are no rules that I am aware of that would prevent this. Obviously, you want to have a specific plan for repaying the loan. If you used a home equity line of credit, your interest payments might be deductible but you’d need to check with your tax advisor to be certain.
If you’d like to have me answer your financial question email me at stewart@welchgroup.com and place AL.com in the subject line. Consult your own professional legal, tax or financial advisor before acting upon this advice.

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