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Subject:  Buying Real Estate in an IRA Date:  7/28/2002  10:25 PM
Author:  ptheland Number:  61025 of 124658

Using IRA money to invest in real estate has been a recurring topic here at the Fool that never seems to get a very definitive answer. Being a tax guy, I thought I'd take a few spare minutes and research the issue. Well, it took more than just a few minutes. And although I was focusing on IRA accounts (both traditional and Roth) it seems that this is also equally applicable to other retirement accounts that a self-employed person might have – SEP's, SIMPLE's, Keogh's, money purchase, profit-sharing, and defined benefit plans.

First off, let's take a look at a few of the specifics of an IRA.

Tax Law
You need a trustee for an IRA. According to IRC section 408(a)(2) the trustee must be a bank (the nitty gritty details include credit unions and S&L's) or an “entity approved by the IRS to act as trustee or custodian.” There's a whole host of rules on what these entities can be, but basically it's got to be an organization that can handle the record keeping and reporting required by a bunch of IRA accounts. Individuals are specifically excluded from being an IRA trustee. You'll commonly find mutual funds and security brokers as qualified trustees, but any organization who can convince the IRS of their experience and skills can be approved as a trustee.

IRC section 408(a)(1) stipulates that contributions to an IRA must be in cash. But a rollover from another IRA or qualified retirement plan can be either in cash or in securities. Contributions are limited to $3000 per year ($3500 if you're over 50) for 2002, increasing to $5000 over the next few years.

IRC section 408(a)(5) says that an IRA trustee cannot commingle funds, except for a “common trust fund” or “common investment fund.” Basically, this means that you cannot mix money from outside an IRA with money in an IRA. However, a group of IRA's can get together to make common investments. And an IRA can invest in mutual funds or partnerships.

There isn't a list of acceptable investments for an IRA, but there is a list of unacceptable investments in IRC section 408(m). The list includes works of art, coins, gems, and antiques, but not real estate. There are also some transactions that are specifically prohibited by IRC section 4975. You can't sell anything to your IRA, you can't perform services for your IRA, you can't use your IRA as security for a loan, and your IRA can't buy property for your personal use. There are some other prohibited transactions, but these are the ones of interest to this subject.

Organizations exempt from income tax can still be subject to income tax if they have Unrelated Business Taxable Income (or UBTI). UBTI is discussed in code sections 511 through 5