Buying Real Estate through IRA
 

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
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.

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.

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

I say that in todays paper.

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

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

No. You cannot use IRA funds as collateral on any loan.

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.

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.

Self directed IRAs can be tricky and their custodial fees can be costly. Self-Directed IRA (SDIRA) Definition

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 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.

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.”

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

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

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