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This Web site contains a compilation of more than a thousand consumer finance  columns written by Tony Novak from the 1980s through 2006, updated and reformatted for maximum usefulness today.  New material was added after 2010.

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Real estate in an IRA

originally posted: 11/22/2006  reposted: 2/18/2011 This post has not been recently reviewed or revised by the author and may be out of date. If in doubt, please send a new question or ask for an update.

Q: I am confused about owning real estate in an IRA. Some Web sites say it can be done, but most financial advisers say that it is not allowed?

A: Owning real estate in an IRA is allowed but many of the functions associated with owning real estate are considered "prohibited transactions" that would cause your IRA to lose its tax benefits and become subject to immediate taxes and penalties. For most people, the risk and limitations outweigh the benefit, especially when there are easier solutions available for handling real estate. Here is a short list of restrictions affecting real estate in an IRA: 1) Do not buy any property for your IRA that was owned by yourself or a related party. 2) Do not sell any property that is owned by your IRS to yourself or a related party. 3) Do not lend money to or borrow money from your IRA. Make sure the IRA has enough cash on hand to handle all operating expenses as they become due. 4) IRAs can not take out mortgages. Real estate must be purchased by an IRA using 100% cash. (This destroys the leveraging effect which is a primary component of overall real estate gains). 5) Do not pay yourself or a related person to manage property owned by your IRA. 6) Make sure property title is held by a qualified trustee (bank or trust company) and all operating expenses are paid by the trustee. 7) Do not live in or take a vacation in a property owned by your IRA. 8) Do not rent real estate owned by an IRA to yourself, a related person or business entity. 9) Do not provide personal service to a property owned by your IRA. Being a do-it-yourselfer is great idea or most real estate owners, but it will disqualify an IRA. 10) IRAs are not allowed to take tax deductions for property taxes, operating expenses or depreciation. 11) You should have a cash balance of at least 150% of the property value in your IRA before even considering buying real estate in the IRA. 12) Consider the fact that the rate of overall net return will be lower for real estate owned in an IRA than if the same real estate were owned by you as an individual. This short list of considerations is enough to discourage most people from using an IRA to invest in real estate. For more complete information, see IRC 4975. As an alternative, consider publicly traded real estate investments that have been earning great rates of return lately. (Real estate mutual funds, for example, returned about 30% per year over the last 3 years and over 16% per year over the last decade). Consider using other types of trusts to own real estate that you do not want to own personally. A personal residence trust , for example, can be a great way to handle ownership of a primary home or vacation property.


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