Real Estate in Self-Directed IRA

L1: Real Estate in Self-Directed IRAThis is a great discussion forum. My question should probably be directed to a different forum, but here goes: I have heard that you can roll over your 401(k) into a self-directed IRA, into which you can put investment real estate properties. It almost sounds too good to be true, which makes me wary. My question: I”ve heard of two companies that act as custodians of such transactions: Names of Companies Removed. Any advice on this concept and/or these companies, or can you direct me to a forum or website that would address this question? Sorry my question is so long. Thank you, in advance.2006-06-14 06:05, By: Abby, IP: [172.16.5.102]
L2: Real Estate in Self-Directed IRAHi Abby,
TheSelf-Directed IRA can also be usedto hold mortgages (1st and seconds) if you don”t want own the properties yourself. I”m using multiple Self-Directed IRAs as part of my SEPP universe where monthly dividends and mortgage payments are deposited back into the IRA for later removal to satisfy my 72T amount. There is a lot of information out on the web aboutwhat you can invest in. Look carefully at the fees that the custodian wants to charge. Somecompanies base fees as a percentage of the asset”s valueothers have yearly and transaction basedfees. Either might make sense depending on the value of the assets.
(P.S. has the policy about mentioning business names changed? I and the Badger have both posted various messages in the pastabout working with Fidelity Investmentsthe names were not removed)
Don

2006-06-14 12:21, By: Don, IP: [24.32.37.113]

L2: Real Estate in Self-Directed IRANo policy change – it depends on the post and the question. This form is set up to deal with questions about SEPPS and not whether one investment compay (or another) is a great place to invest.
We are not in the business of endorsing any companywhich would include references to functions outside the areas dealing with a valid SEPP. If someone were to post a question whether Fidelity or Schwabwas the place to be, I would probably just delete the post. 2006-06-14 12:33, By: Gfw, IP: [172.16.1.74]

L2: Real Estate in Self-Directed IRAEven though this may not be the right, or best, forum for this topic, it does have some applicability because of certain nuances.
First, Ed Slott, “THE IRA ADVISOR” (and guru), had a major article on this topic within the past year. He warned about the fact that “REAL ESTATE IN A SELF-DIRECTED IRA” could not be any property owned, lived in, rented by, mamaged by, or in any way connected to the taxpayer. All of the aforementioned activities are deemed by the IRS to be “prohibited transactions”. They could only be “passive investments”, such as REITS, real estate partnerships, etc. Taxpayers have been misled into thinking they could buy homes, vacation homes, residences for family members, office buildings for their businesses, etc.
However, also consider the fact that you invest for gains. Investments outside of retirement plans are taxed at 15% on the capital gains, while the TOTAL INVESTMENT PLUS THE GAINS are taxed at ordinary income tax rates of 25%-35%. (Low income taxpayers pay 5% on capital gains and 15% or less for regular taxes.) Further, rental real estate can be depreciated for investments outside of a retirement account to reduce taxable income, while there would be no depreciation benefit for real estate within a retirement account.
Another issue to consider is the REQUIRED MINIMUM DISTRIBUTIONS after reaching 70 1/2. You would have to make sure that there was adequate cash or saleable investments in order to make those distributions when the time comes. Further, I don”t know of any financial institution which would provide a mortgage to an IRA, so therefore you could not “leverage” this investment.
On the other hand, I just attended a professional presentation specifically on this topic, which can be very rewarding if done properly. Even “flipping” real estate investments, short-term gains, etc. can be very lucrative. It was eye-opening, but it came with the warning about “prohibited transactions” and not “self-dealing”. Rental properties must be managed by someone else, and you can’t even do repairs, rent collections, etc.
As an aside, our PA CPA chapter has had a recent extensive dialogue/discussion going on a new concept that concerns setting up new businesses in self-directed IRAs. The current issue of Tax Hotline discusses this in a 2-page article, and the related “Swanson Case”. Ed Slott and I are very leary of this idea, and it is really of limited value when you realize that the taxpayer is not allowed to provide any services to, nor have any involvement in, that new business that he funded with his retirement money. Further, since 80% of all new businesses fail, why would anyone want to jeopardize their retirement in this way — and not even get a tax write-off for the loss ???
YOU ARE FOREWARNED !!     BE CAREFUL !!!! GET PROFESSIONAL ADVICE FIRST !!!!!2006-06-14 13:06, By: dlztaxes, IP: [4.175.9.210]

L2: Real Estate in Self-Directed IRAI was not objecting to the question of whether Real Estate in an IRA was an appropriate investment – I personally don”t think it is.
What I don”t want posted on this forum are questions asking for investment advice relative to whereor with whom one should invest their IRA – that”s investment advice and that”s not what the forum is about.
Gfw

2006-06-14 13:17, By: Gfw, IP: [74.136.84.204]

L2: Real Estate in Self-Directed IRAGFW — Sorry, my comment was in reference to Abby”s comment about whether or not the question was appropriate for the 72T forum. I was not responding to your posting about companies or investment advice.
(No further response necessary)2006-06-14 13:54, By: dlztaxes, IP: [4.175.9.210]

L2: Real Estate in Self-Directed IRAOne sentence in DLZ”s post got my attention:
Further, I don”t know of any financial institution which would provide a mortgage to an IRA, so therefore you could not “leverage” this investment.
I am an investment advisor and not a tax advisor, but this question raises a good question about the legality of using real estate, outside the REIT / LP arena, for funding an IRA. I believe one of the IRA rules states that you may not use your IRA as collateral for a loan. Doing so creates a “deamed distribution” of the IRA. This situation would make the IRA fully taxable at that time, and may be subjected to the 10% early withdrawal penalty if the IRA owner was less than age 59 1/2. Rarely does real estate investing not involve making loans against the property. So I can”t imagine anyway to invest in real estate inside of an IRA where a mortgage must be created.
Jim2006-06-14 14:26, By: Jim, IP: [70.184.1.35]

L2: Real Estate in Self-Directed IRAI agree with the others who voiced concern over additional constraints of holding RE investment propertiesin an IRA. Since many of the tax breaks accorded to real estate outside an IRA do not apply within the IRA, one must conclude that the recent buzz surrounding this concept stems from the cyclical booming appreciation rates and the demand for funding sources to acquire these properties. After all, a 1031 exchange can also be used to defer taxes on RE gains, but you must already own at least one property to use a 1031. If initial buyers without RE experience are using their IRA accounts, you have the risks of novice buyers fully dependent on the expertise of the IRA custodian and RE agent, layers of overhead costs, and the IRA rules including prohibited transactions, excess contributions, etc. All of these factors in combination can depress the gains from the RE investment at a time when RE values are peaking and interest rates are rising. Another concern is IRS enforcement activities which are taking a hard look at tax shelters of all kinds, and the IRS normally does not apply heavy scrutiny until a certain practice has attained a critical mass. RE in IRA accounts may be approaching that area, so potential investors should do all their homework before committing to this.2006-06-14 15:16, By: Alan S., IP: [24.116.165.157]

L2: Real Estate in Self-Directed IRAThank you all for your thoughtful answers. I will definitely do my homework. As I”ve heard often, “If it sounds too good to be true, it probably isn”t. Having said that, I believe that there might be some value in Investing in RE in self-directed IRAs, but I know that one mistake and you”re toast with the IRS. My homework begins now. THanks again. Abby
2006-06-16 17:22, By: abby, IP: [68.55.38.29]