Buying Real Estate through IRA

[Jerry Leinsing]

Is this a Caveat Emptor or bad advice. There is an ad in ‘Daily Sun - Lifestyles’ Page D11 “A Smart Way to Buy Your Villages Property: Use your IRA”that I happen to see and read by accident. I was asked why didn’t we do that? Soooo, let’s go search the web because I know a lot about IRA rules but never focused on this one.
I read the comments from 3 clients. They all state that the bought their vacation home in the Villages. I must logically assume ‘vacation home’ means they have a permanent one somewhere else.
Using IRA Money to Buy Real Estate (https://www.thebalance.com/rules-of-buying-real-estate-in-an-ira-2388761)
Well, I certainly understand buying an asset and letting it appreciate inside the IRA because many of us buy and sell stock held in an IRA. Note that when RMD comes around, you or your custodian needs to sell some portion to send the RMD info to IRS.
Basic Rules: Get this...
Can’t mortgage the property
Can’t make repairs or work on the property yourself. Must hire independent contractors
Can’t receive any personal benefit from the property - Can’t live in it or use it in any way. The real estate owned must be for investment purposes only.
They 3 comment that they are enjoying their vacation home living in the villages.
Man, I hope I only have part of a story but I don’t think so. They can’t be living in their investment. It is not allowed. Pretty hard to spin this scenario any other way.
I am not disparaging the Consultant doing these seminars because I did not attend one but the fact, after research, you can’t do what the ad says.

[retiredguy123]

Also, if you make a gain on the property, it will be taxed as ordinary income. No benefit from capital gains rate or possibly no tax at all for a qualifying property.

[champion6]

When you reach the age that you must begin making an annual Required Minimum Distribution, where is the cash within the IRA?

[Stu from NYC]

I say that in todays paper.

Wonder how the advertiser spins this as a good thing to do.

[manaboutown]

Can you do a reverse mortgage with an IRA owned home?

[retiredguy123]

Can you do a reverse mortgage with an IRA owned home?
No. You cannot use IRA funds as collateral on any loan.

[valuemkt]

It's both bad advice and Caveat Emptor. You did the simple due diligence that describes prohibited persons and disqualified properties. The people deciding to buy on the fringes .. give a wink wink and bet on the come that IRS won;t catch up to them are the same folks that "give it to the man" whenever they get a "free" roof from their insurance company, buy a tool from home depot, use it and then return it .. etc .. I didnt see the ad, but I would certainly never do business with whomever is peddling this incorrect drivel. And BTW, I have used IRAs for investment properties for many years, understand the rules, and have walked the talk.

[retiredguy123]

Some financial consultants will try to get you to use IRA money for lots of bad investments. The most popular is annuities, which is another bad idea.

It reminds me of the story about a bank robber named Willie Sutton. When asked why he robbed banks, he said, "that is where the money is". For many people, their largest asset is their IRA.

[manaboutown]

Self directed IRAs can be tricky and their custodial fees can be costly. Self-Directed IRA (SDIRA) Definition (https://www.investopedia.com/terms/s/self-directed-ira.asp)

[billthecpa]

Using the IRA for personal purposes is fraught with danger that IRS will invalidate the entire IRA to be taxable income. As a CPA, I would never recommend, and would strongly discourage, a client doing any such thing. In fact, if a client went ahead and did it anyway, I would terminate the relationship so.....when it blows up in their face....they could not say....."the CPA said it was OK."

[FredJacobs]

I have been a tax preparer for over 50 years and a financial consultant for over 30 years. I think this is bad advice.
1. You may withdraw up to $10,000 from your IRA (here, IRA will refer to all retirement funds) to buy your FIRST HOME with out penalty if you are underage for RMDs. You are still subject to income tax on the withdrawal. Of course, Roth IRAs, held for at least 5 years are withdrawn tax-free. First Home, according to the IRS, means not living in a home that you own for the last TWO YEARS.
2. Clients are always warned - Your retirement comes first - it has the highest priority. We caution young families to put money away for their retirement before they consider their children's college AND do not withdraw from your IRA for current college payments. People are living longer. Under recent Mortality Tables, a 65 year old man can expect to live to age 81. However - an 81 year old man can expect to live to age 90. You should accumulate enough cash to be combined with social security, pensions, 401ks and annuities to last for 25 years.
3. Buying a house using IRA money does NOT make the house part of your IRA.
4. Selling your home - the one that is your primary residence - defined by the IRS as the address you pay taxes from - can be tax-free if you have lived in it for two of the last 5 years. If so, a married couple can exclude $500,000 of capital gain before any tax is due.

[TomPerry]

Using the IRA for personal purposes is fraught with danger that IRS will invalidate the entire IRA to be taxable income. As a CPA, I would never recommend, and would strongly discourage, a client doing any such thing. In fact, if a client went ahead and did it anyway, I would terminate the relationship so.....when it blows up in their face....they could not say....."the CPA said it was OK."
I completely agree! Also, very few IRA custodians will also the holding of real estate. When I was practicing, I fired several clients also. We always told our clients, “We love our clients, but not enough to be your cellmate.”

[CoachKandSportsguy]

FYI, in general, the level of financial fraud which is seen today as exponentially higher than 20-30 years ago. So please due any due dilligence with finance professionals, even cpas, though cpas are the experts on tax and audit minimizations, there are others who are income maximization specialists. However for TV s who are mostly seniors by definition, illiquid investments and income maximization time is well past, so conservative and liquid investments, with high quality is always best.

So please consume all information with a doubting thomas approach first, especially on the internet. FYI, most financial scam artists can't help themselves, even after spending time in court or in the pokey

sportsguy

[CoachKandSportsguy]

2. Clients are always warned - Your retirement comes first - it has the highest priority. We caution young families to put money away for their retirement before they consider their children's college AND do not withdraw from your IRA for current college payments. People are living longer. Under recent Mortality Tables, a 65 year old man can expect to live to age 81. However - an 81 year old man can expect to live to age 90. You should accumulate enough cash to be combined with social security, pensions, 401ks and annuities to last for 25 years.


I don't agree with this advice for a couple of reasons, but this is a thread highjack. First, this strategy is a hedge against lifestyle in the future, which is uncertain and has a government income stream when you get there.

The biggest event risk during your employment years, which is extremely hard to hedge, is continued employment, from which the retirement savings is derived.

Therefore, the number 1 investments should be around maintaining your employability to get past HR filters, and the ability to relocate where the jobs are, as companies move all the time now, primarily for employee and tax cost reductions. That is very difficult to hedge, both my boss and i were unemployed for three years, which wiped out alot of savings and retirement savings, and as you get older its harder to get jobs to maintain your current standard of living.

So IRAs are secondary to supporting the income stream which supports the IRA. . . again, goes to the income maximization strategy during employment years, not the retirement years, which requires income to be reinvested back into yourself and your family. The future is uncertain, and more so in the employment world of today.

I have other opinions on this from certain biases, as I have seen this advice from other finance professionals which was not fiduciarily correct.

but just another a$$hole's opinion on TOTV

sportsguy

[Bolsadd]

Very expensive I used Equity Trust cost me $300 a year for one piece of property unfortunately that piece of property declined not increased in value ..waste of money for many many years

[rphil11ort]

no you can't

[rphil11ort]

You can buy an investment property using a self directed IRA but can not live in it. All repair bills, maintenance bills must go through that IRA . Any rent will go through the IRA or will be taxed as at the full income tax rate. I have a self directed ira and buy homes to have fixed up and flip. Don't know if I would by a rental property the expenses of writing checks and depositing checks is not cheap

[dkaufnelson]

I've seen the ad for this man who says you can buy your retirement home through an IRA, but this is totally misleading, as you can only use it as an investment property and can't ever live in it. Here's a concise list of pros/cons: Pros and Cons of Property in an IRA
We've mentioned so many hassles and drawbacks, you might be wondering at this point if there is any point to putting property in an IRA. Historically, real estate has been a good long-term investment as property values rise over time, and long-term appreciation goes hand-in-hand with the long-term investment horizon of a retirement account. In the short term, any income the property generates is tax-sheltered within the IRA. Finally, as a hard asset, real estate helps diversify a portfolio otherwise invested in equities and other securities—not the worst idea in the world.
Pros
• Real estate helps diversify a portfolio, often moving counter to financial markets.
• Real estate has historically appreciated over time, ideal for an IRA's long-term investment horizon.
• Real estate can provide a steady income stream from rents, and any rental income you collect grows tax-free within the IRA.
• You can buy, sell, flip, and accumulate properties.
Cons
• You need to set up a self-directed IRA with a custodian.
• You can’t claim deductions for property taxes, mortgage interest, depreciation, and other property-related expenses.
• All expenses, repairs, and maintenance costs must be paid with IRA funds, and you must pay others to do them and manage the property.
• You and your relatives can’t live in or run a business out of the property.
Check on the internet and you can easily find the laws about IRA investments in real estate!

[retiredguy123]

I've seen the ad for this man who says you can buy your retirement home through an IRA, but this is totally misleading, as you can only use it as an investment property and can't ever live in it. Here's a concise list of pros/cons: Pros and Cons of Property in an IRA
We've mentioned so many hassles and drawbacks, you might be wondering at this point if there is any point to putting property in an IRA. Historically, real estate has been a good long-term investment as property values rise over time, and long-term appreciation goes hand-in-hand with the long-term investment horizon of a retirement account. In the short term, any income the property generates is tax-sheltered within the IRA. Finally, as a hard asset, real estate helps diversify a portfolio otherwise invested in equities and other securities—not the worst idea in the world.
Pros
• Real estate helps diversify a portfolio, often moving counter to financial markets.
• Real estate has historically appreciated over time, ideal for an IRA's long-term investment horizon.
• Real estate can provide a steady income stream from rents, and any rental income you collect grows tax-free within the IRA.
• You can buy, sell, flip, and accumulate properties.
Cons
• You need to set up a self-directed IRA with a custodian.
• You can’t claim deductions for property taxes, mortgage interest, depreciation, and other property-related expenses.
• All expenses, repairs, and maintenance costs must be paid with IRA funds, and you must pay others to do them and manage the property.
• You and your relatives can’t live in or run a business out of the property.
Check on the internet and you can easily find the laws about IRA investments in real estate!
I have to disagree with your pro's.

- real estate only diversifies your IRA portfolio, but you can diversify your entire portfolio by buying real estate outside of your IRA.
- real estate appreciates over time but not nearly as much as stocks.
- real estate within an IRA provides no spendable income stream because you can't spend it, and the income does not grow tax free within a traditional IRA. The income and earnings will be taxed as ordinary income when you withdraw it from the IRA.
- you don't need to use an IRA to buy and flip real estate. And, if you lose money on an IRA investment, you cannot offset the loss on your taxes.

[DAVES]

When you reach the age that you must begin making an annual Required Minimum Distribution, where is the cash within the IRA?


Not sure what you are asking. If, your IRA is with a brokerage, or a bank you should ask them. I get a letter every year telling how much I must withdraw that year. You do not need to take it out any particular day. You can ???? dollar cost withdraw-take part every week, every month etc. You can choose what to sell to get the cash. You can decide to hold enough in cash to cover what you are forced to withdraw. You can transfer enough shares into your taxable account at their value on the day you decide to do this. You cannot transfer shares, in kind, into a roth. The TAXMAN decided they have waited long enough for their cut.