Rental Property in Retirement Plan with Segregated Accounts??

[Guest DeePA]

Can a Profit Sharing Plan participant purchase a Condominium and collect rental income as investment gains to the Plan? The plan offers segregated particiant investment accounts (all directed investments-no trustee direction)?

What issues are involved??

Thanks

[Kirk Maldonado]

You've got a slew of issues to look at, including unrelated business taxable income and unrelated debt-financed income.

I recommend that you hire competent ERISA counsel for advice on this issue.

[david rigby]

Based on similar inquiries on these Message Boards, I'll bet there is an expectation that the condominium will be used by an employee/officer/owner. Uh oh.

For example, http://benefitslink.com/boards/index.php?showtopic=7482

Take Kirk's advice.

[mbozek]

If the plan permits self directed investment in RE and the account purchases the property for cash with no debt there should be no regulatory issues provided that the employee derives no benefit from the property, e.g, does not have a rent free office or residence. Using the condo as security for a loan will generate UBIT when the property is sold at a max rate of of 38.6% for gain in excess of $9350. However, putting RE in a Q plan or IRA by an individual investor is not a good investment move because of the loss of tax benefits (deduction of expenses, taxes, insurance, interest, depreciation, loss of capital gains) plus the admin problems (plan admin may not agree to hold title to RE because of all the legal and paperwork requirements, providing tax notices as well as liability risk to plan because as legal owner it would be a defendant in a negligence law suit or envoronmental pollution claim). Also the participant/plan account will have to pay for the cost of counsel to handle legal issues including preparation of deeds, notices, eviction notice, defense in dispute over rental agreements etc since the PA will not do such chores. PA may require that participant pay legal costs for review of legal docs by plan counsel which PA must sign. Finally RE is an illiquid investment and owner may be forced to sell at an inopportune time. The participant needs to hire competent ERISA counsel to review all the aspects of the purchase of RE as a plan assets.