Message Font: Serif | Sans-Serif
 
No. of Recommendations: 0
I'm not seriously considering doing this, but I am just sort of curious how it works. I have read that it is possible to invest in investment real estate with IRA funds. Assuming this were possible, how do the taxes work?

I assume that if there are any tax benefits (i.e. depreciation), the IRA can't realize or carry forward any tax losses. I also assume that if there are capital gains when a property is sold, they are deferred as are other capital gains. But how about any operating income from an investment property in the meantime? Is this classified as UBTI (unrelated business taxable income), and is thus taxable if over $1000 per year?

There is very little information about this readily available via Google. If anyone has any informational resources where I can learn more, I'd appreciate them.

Thanks!

Randy
Print the post Back To Top
No. of Recommendations: 1
I'm not seriously considering doing this, but I am just sort of curious how it works. I have read that it is possible to invest in investment real estate with IRA funds. Assuming this were possible, how do the taxes work?

I assume that if there are any tax benefits (i.e. depreciation), the IRA can't realize or carry forward any tax losses. I also assume that if there are capital gains when a property is sold, they are deferred as are other capital gains. But how about any operating income from an investment property in the meantime? Is this classified as UBTI (unrelated business taxable income), and is thus taxable if over $1000 per year?

There is very little information about this readily available via Google. If anyone has any informational resources where I can learn more, I'd appreciate them.


Your best bet might be to google "real estate" and "IRA" and look at the companies that are involved in this area. They probably have some information available online. IIRC, rental income is not UBTI. For more information see the instructions to Form 990-T.

Ira
Print the post Back To Top
No. of Recommendations: 0
IIRC, rental income is not UBTI

The rule of thumb I've heard thrown around is that the income is not UBTI if the real estate is owned outright, but if it is financed with debt, then it is. Similarly, if the IRA invests in an investment partnership that uses any debt or leverage, the gains attributable to the leverage are UBTI.

However, I've never been able to source this...

Thanks,
Randy
Print the post Back To Top
No. of Recommendations: 1
Try this on for size. It's probably not perfect, but it is a compilation of the information I was able to gather.

http://boards.fool.com/Message.asp?mid=17596619

--Peter
Print the post Back To Top
No. of Recommendations: 0
Wow, great! Thanks Peter! Just the kind of thing I was looking for.

T
Print the post Back To Top
No. of Recommendations: 0
The rule of thumb I've heard thrown around is that the income is not UBTI if the real estate is owned outright, but if it is financed with debt, then it is. Similarly, if the IRA invests in an investment partnership that uses any debt or leverage, the gains attributable to the leverage are UBTI.

If the IRA invests in an investment partnership that uses debt or leverage, I believe the IRA ceases to be an IRA. Using debt within an IRA is a prohibited transaction.

Ira
Print the post Back To Top
No. of Recommendations: 0
Try this on for size. It's probably not perfect, but it is a compilation of the information I was able to gather.

http://boards.fool.com/Message.asp?mid=17596619


Nice analysis, Peter. And you cleared up a bit of confusion on my part. Pledging your IRA as collateral against a loan is a disqualifying transaction, but that doesn't preclude using debt to finance a real estate investment within the IRA since the real estate itself is the collateral, not the IRA.

Ira
Print the post Back To Top
No. of Recommendations: 0
If the IRA invests in an investment partnership that uses debt or leverage, I believe the IRA ceases to be an IRA. Using debt within an IRA is a prohibited transaction

I was told by a CPA who specializes in private investment partnerships that this is allowed, but any gains attributed to the leverage are UBTI and thus taxable. It came up in the context of investing IRA funds in a private investment partnership (i.e. hedge fund) which uses leverage.

When it comes to brokerage accounts, IRAs are “cash accounts” and may not use margin to buy stocks (or other forms of debt-leverage for purchasing stocks). If an IRA invests in a hedge fund or other investment company that uses leverage, that is tantamount to breaking the rule on the use of leverage. The consequence is the generation of UBI from the income in the hedge fund and taxes on that income (UBIT).

http://www.greencompany.com/Traders/TraderRetirement.shtml

Note, I don't suggest that anyone invest in a hedge fund, with IRA money or otherwise, this is just for discussion purposes...

BTW is it UBTI or UBIT? I see both used.

Randy
Print the post Back To Top
No. of Recommendations: 0
BTW is it UBTI or UBIT? I see both used.

Both are correct. Unrelated Business Taxable Income or Unrelated Business Income Tax.

--Peter
Print the post Back To Top
No. of Recommendations: 0
BTW is it UBTI or UBIT? I see both used.

You say to-may-to and I say to-mah-to. Seriously, although they are both used, it is my understanding that UBTI is "unrelated business taxable income" and UBIT is "unrelated business income tax" -- different parts of the same beast.

Ira
Print the post Back To Top
No. of Recommendations: 0
If anyone is looking for a self-directed IRA trustee that allows real estate I can dig up the links for two that I know of. Being a RE investors this is a topic that is front and center with a number of RE investors.

A tangent is the best ways to invest using a self directed IRA...

You can buy a rental property with your IRA funds in an area that you want to eventually retire to. You operate the property correctly for the period when you are not drawing down the IRA. Pay any taxes due or structure the income so you do not have taxes due (see the ongoing discussion about when income in an IRA is taxable). When it is time to retire you arrange a distribution of the property from the IRA to yourself.

Benefit? It helps you get control of a property now that you want much later.

You can buy notes and discounted notes for your IRA. You would be earning between 10% and 15% depending on the type of deal you do. This is interest paid monthly and with the IRA wrapper not a bad way to go given the yields.

As IRA's allow tax deferred or tax free growth it can be better to use the IRA to invest in high leverage opportunities. If you find a property for sale that looks like a good deal you can get it under contract using the IRA as the potential buyer. An earnest money agreement or an option are two common ways to do this. You then find a buyer for the property before you actually finish your purchase. You either assign your interest, sell the option or line up the purchases and sale as a back to back set of transactions.

By having a short hold and maybe little to no money into the property you will have very good leverage so very good returns.

I appreciate that some of the ideas above require RE knowledge. I want to make the point that if you think outside the box you can use the IRA in a completely legal but very rewarding fashion. There are other places to get RE knowledge so lets not bog down this forum with the specifics of a RE transaction. Just think about if this might be for you and then check out the other forums (plus some other sources such as the web sites for the self-directed IRA trustees) for more info.

John B. Corey Jr.
Print the post Back To Top
Advertisement