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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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The two real estate custodians named by Business Week are:

Entrust Administration of Oakland, CA and Jim Maxwell, owner of a Ridgefield, WA business.
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Paul--

Do you have an on-line link to the article, or will I have to get a paper copy?

Until then, did you notice anything different from what I posted here: http://boards.fool.com/Message.asp?mid=17596619

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.

Unfortunately, the detail the professionals will be working out are how much penalty you owe on this transaction. What you describe would be a prohibited transaction. You can't sell to or purchase from your IRA. And the definition of "you" would include a corporation that you control.

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?

No to both of these. These are additional prohibited transactions. You are, in this case, buying from your IRA. Your lineal ancestors and descendants are among those that are too closely related to have transactions with your IRA.

Could a friend?

Yes. They are not related to you.

Must they pay market rates?

No, but why would you want to rent to a friend at below market rates? And I doubt that your friend would pay above 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.)

If you're talking about giving your friend some money so that they can pay more than market rents, then yes, I'd expect you to have a problem with the IRS. They are free to look at the substance of a transaction over it's form.

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

I discuss that issue in the post I linked above. And there was some further discussion of it in the rest of the thread.

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

I absolutely agree.

--Peter
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Hi Peter,

Thanks for the response. I was not aware of your earlier posting on the subject on the Tax board. You seem to have researched it thoroughly. Yours is more detailed. Their's is more of a general overview.

The Business Week article is the one titled "Add a House to Your IRA" by Ellen Hoffman in the Business Week Investor section. The title is listed on the following page--

http://www.businessweek.com/magazine/toc/02_46/B3808magazine.htm

I couldn't figure out how to access the full article.

Paul
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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.

My reading of the tax code suggests that you cannot have a house in your IRA that you (or your family) live in or plan to live in. But I'm not a tax lawyer.

If the property purchased is a rental property, its not clear if you could rent one of the units from your IRA

This sounds like it would be a conflict-of-interest situation.

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

The tax code is very clear that no part of the IRA assets may be pledged as security for a loan.
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Thanks for your comments, jrr.

"The tax code is very clear that no part of the IRA assets may be pledged as security for a loan."

There seems to be of difference of opinion here in that the BW article clearly discusses making mortgage payments for the property. I suspect it can be argued that the net equity in the property is the asset in the IRA, not the mortgaged portion.

But your comment does point out the importance of assembling a knowledgeable team of experts before you proceed. This seems to be a gray area where the rules are subject to interpretation.

For a small account, its not worth the hassles. For a large account, prepared to pay for the help of those experts, it might be.
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See message 38991 for a recent discussion of real estate in IRAs.

http://fireboards.fool.com/Message.asp?mid=20284986&Posted=20285090&pt=r
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See also message message 16633 on the Foolish 401k board.

http://fireboards.fool.com/Message.asp?mid=19759023&sort=whole#19761456
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See also messages 5291 and 5325 on the Real Estate Investing Board

http://boards.fool.com/Message.asp?mid=21432308
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See message 18382 on the 401K board--

http://boards.fool.com/Message.asp?mid=21888137
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See this posting (message 44072) on the Retirement Investing board--

http://boards.fool.com/Message.asp?mid=21921792
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See message 47327 on this board--

http://boards.fool.com/Message.asp?mid=22920453
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See message 9029 on the Real Estate Investing board--

http://boards.fool.com/Message.asp?mid=24725907&sort=whole
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A recent thread on the Ask a Foolish Question board--

http://boards.fool.com/self-directed-ira-llc-29971309.aspx
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See also the discussion at message 71450 on this board.

http://boards.fool.com/where-could-i-go-about-finding-out-ho...
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See also message 78376 on this board--

http://boards.fool.com/self-directed-ira-custodians-31959829......
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See also message 14055 on the Real Estate Investing discussion board.

http://boards.fool.com/ira-real-estate-32186301.aspx
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