PT when SELLING Roth real estate

[Guest portstjoe]

I understand that PURCHASING real estate from a lineal ascendent/descendent is a PT in my self-directed ROTH. My questions are :

May I purchase a piece of raw land with my contributions (not earnings), hold for the 5 yr. period, then sell it to my son or daughter? Or could I then sell it to an arms length party, who might then sell it back to me? Am I required to contribute the proceeds of the sale back intio the ROTH? Any chance I could sell it to myself?

[Mary Kay Foss]

I don't understand the attraction of investing in real estate with an IRA, even a Roth IRA. Property taxes must be paid by the IRA (no one gets a deduction for them); there may be other expenses, weed cutting etc. that would be deductible by a private investor. Although there is no tax with a Roth, the 15% capital gains tax rate seems pretty attractive for a real estate investor. But that isn't what you asked.........

There is a prohibited transaction if you buy or sell anything to/from your Roth IRA. Selling to a relative would also be a prohibited transaction. If you sold to a third party with the understanding that it would be resold to a family member, that would also be a PT. It only works if you just market the real estate when you're ready and sell it to a third party who will do with it what they will.

[Guest portstjoe]

Thanks for answering my question. As for the attraction of investing in RE in an IRA, it seems obvious to me. The rate of return on your investment , if you know what to buy, blows the $100 or less a year return on mutual funds, out of the water.

A no brainer, unless you don't care if your money does nothing.

[mbozek]

And just what do you buy? I dont know any mutual funds that requirepaying for the expense of maintaining your investment for property taxes, ins., lawyers, etc.

[John G]

With the revised tax rules governing the sale of a primary residence (no tax on up to 500,000 in gain if you live there 2 out of the last five years), I am not sure what the fascination with trying to do real estate in an IRA. If you are talking a regular IRA owning a primary home, I don't see the advantage. You may be comparing no tax on the sale of a primary residence to gain within an IRA taxed as ordinary income in the future.

When you own a home, most folks get a deduction for property taxes and interest each year. When the cash down is 5-30% of the home price so the investment is leveraged. Those are advantages over and above the new possible exemption for taxes upon sale.

Virtually all IRA ownership of non-traditional investments means higher costs, more complications (like year end appraisals) and more paperwork. Sure there are ways to make money in real estate. But, not everyone "knows what to buy", has the time, patience, negotiating skills, repair skills and ability to work with renters/leasees.

The comparison to a $100 dollar return on a mutual fund looks very odd. Where are the assets that are going to allow you to buy real estate if the account is only earning $100?

My experience tells me that very little involving investing or real estate is obvious, and that there is no single approach that works for everyone all the time.