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Subject:  Real Estate in IRA/Roth IRA Date:  11/8/2002  9:08 PM
Author:  pauleckler Number:  35197 of 88502

According to an article in the Nov 18 issue of Business Week (p 134), it is legal to own real estate in an IRA or better a Roth IRA account. To do this you need to find a custodian willing to handle the paperwork (the article lists several). You also need to structure the purchase so all cash expenses (property taxes, insurance, mortgage payments, management fees, etc) can be funded from investment income within the account and/or within the $3K/yr ($3.5K over 50) annual contribution limit. You would also need a tax expert to help you avoid UBTI (unrelated business tax) of 39.6% that can be due on some investments when they are held in IRA accounts.

The article states you must be careful about distributions. The account should generate sufficient cash to pay mandatory distributions after age 70-1/2. Its probably best to sell real estate prior to that age and reinvest in more liquid assets. (The article didn't state but I would think you could create a corporation, sell the IRA property to the corporation and then distribute appropriate numbers of shares in the corporation–if you are willing to deal with the paperwork and pay the professionals to work out the details.)

The article states you can buy a home with your IRA with the intention of moving in but this requires approval of the Labor Department and would cost about $3500 in fees.

If the property purchased is a rental property, its not clear if you could rent one of the units from your IRA. Could your grandmother? Could a friend? Must they pay market rates? (If not, this becomes a device to transfer funds in and out of your IRA–ideally without paying penalties. I'm sure the IRS would watch this aspect closely.)

Real estate in an IRA is clearly not for everyone. But it could work for large accounts especially of the size that sometimes rollover from 401Ks or pension plans. It becomes more attractive if you think real estate investments are likely to continue to out perform stocks. Of course, diversification and liquidity are potential problems. So choose that property carefully.

Can your IRA take out a mortgage? It sounds like it can.

Can you become a real estate magnate with your IRA account? Its possible.
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