Can a ROTH IRA Purchase and Own a piece or Real Property?

[Guest KevinDP]

I would like to know if a ROTH IRA can purchase and own a Property. I have a ROTH and I want to invest in another property. I was told that the ROTH could do that for me. Is that true?

[mbozek]

A roth IRA may invest in RE. However there are limitations - you can not have a Roth IRA invest in a home that you or family member will live in and you cannot use have the IRA borrow money to purchase the RE because these are prohibited transactions. Also there are few IRA custodians who will own the RE because of legal liability issues (environmental and negligence). A custodian will charge a high annual fee for custodial duties. Also owner must provide an annual fmv of the RE to the custodian for IRS reporting purposes. While the Roth IRA assets will not be subject to taxes when sold, no loss can be recognized if the property is sold for less than the purchase price. Foreign RE is almost impossible to place in an IRA.

[John G]

Note, you normally seek to have long term capital gains with real estate. In a regular IRA, all transactions will ultimately be taxed as ordinary income. Which, even if defered, is going up in tax bracket.

Plus, you need to ask yourself if the real estate will perform as well as equities over a long haul. I would also imagine that you might have problems if you upgrade the property with your money and then sell it. It would seem to me that you could artificially boost a retirement account this way to a level you could never reach via normal annual funding.

When you seek to take money out, you have a very lumpy investment and possibly liquidity issues. Hard to sell just 10% of a home or office.

[BPickerCPA]

John,

You would not be able to upgrade the property with your own money. That is another problem. If for some reason you need an infusion of cash (e.g. no tenant due to economic downturn and the real estate tax bill is due), you cannot contribute more than the annual Roth limit, which could be as low as zero. Then what?

[Guest b2kates]

Further, if you mortgage the property, the income would be subject to unrelated business income tax. Effectively turning a tax exempt investment taxable.

[mbozek]

Given all of the above problems why would an individual investor want to put RE in an IRA?

[Guest Steve Palmer]

I am a little confused. When is debt acceptable? mbozek said in his (or her) response above that you cannot borrow money to purchase real estate. b2kates says you could mortgage the property, but create UBTI.

Thank you.

[Guest b2kates]

I believe that mbozek's point was that if you had debt and the property could not make the debt service payments, the IRA would be in trouble since the owner could not contribute addtional funds or pay the obligation directly.

Regardless, my point is that debt financed property in a tax exempt vehicle is subject to the UBIT rules in Code Section 511 et al.

[Guest halka]

Don't think there is absolute prohibition against the IRA borrowing and pledging the real estate as collateral. You do, however, run into the liquidity, cash flow, and UBTI problems. The IRA owner can NOT pledge the IRA as collateral for a loan to the IRA owner, but the IRA can be a borrower. But for all the reasons stated by others, it just is not practical to own (leveraged or unleveraged) real estate in an IRA (even if you can find a trustee that would allow it).

[John G]

I think sometimes the real estate issue is proposed when a taxpayer thinks it will solve some problem. The simple answer is that real estate ownership via a Roth or IRA can expose you to a lot of problems. It will generate problems, not solve them.

And... do you really have the expertise to handle real estate transactions.... and if you get sick or are disabled, does you real estate investment become unworkable?

You don't need real estate as an investment to reach your investment objectives. There are 8,000+ stocks and 8,000+ mutual funds and a ton of bonds.... so why make life complicated by trying to do real estate with an IRA? I just think it is the proverbial "can of worms". You also don't need to beat the market to have success if you are in for the long haul.

The long run market average for equities is somewhere between 10% and 14% depending upon your snapshot, time period and definition. Blend in some fix rate securities and you should be able to average 10+% which means your assets double about every 7 years. So 3K contributed at age 25 grows to 6k, 9k, 18k, 36k, 72k, and finally 144k at age 67. And each year afterward another 3k contribution grows to 144k in the year following (68). That is a lot of mulla even in future dollars from one simple program. Add on top 401ks and SSN and you may be yachting in the south Pacific.

[mbozek]

My comments were directed to the fact that the gain on debt financed property is subject to taxation at the rate for trusts in the year the gain in excess of $1000 is recognized (i.e., 39% on a gain over $8900) which makes it difficult to obtain a market rate of return after the finance charges are subtracted. There is nothing illegal per se in a qualified plan or IRA in using borrowed money for investment purposes.