Real Estate inside an IRA

[Guest smillard]

If real estate is purchased inside an IRA and there is a mortgage on the property can the mortgage payment come from outside of the IRA or must the payment come from the IRA?

[401 Chaos]

Smillard,

This is not my area but I believe there really is no way around having the IRA pay the mortgage. There are several prior links that touch on this and related issues. Bottom line is that you must pay the mortgage from the IRA and are limited in what you can contribute to an IRA annually so you can run into real problems. Owning real estate in an IRA can create lots of other problems. Although you may see various "schemes" saying you can do this and get around the issues, my sense is such arrangements are just asking for trouble.

http://benefitslink.com/boards/index.php?s...hl=mortgage+ira

[Ron Snyder]

I agree with Chaos.

1. Issue 1-PT. Review IRC section 408(e). Can the IRA obtain a mortgage without someone else lending their credit (such as the account holder)? That extension of credit would be a prohibited transaction. The general rule is that an IRA can purchase that real estate it can pay cash for.

2. Issue 2-CG to ordinary. The other problem is that real estate is a tax-shelter in its own right. Property can be sold with gains deferred through a tax-free exchange. And capital gains, when not deferred, are taxable at lower rates than IRA distributions, which are ordinary income. [Note: this would not apply to a Roth IRA.]

3. Issue 3-UBIT. A mortgage on real estate inside an IRA (even when a mortgage can be obtained without a prohibited) creates the possibility of unrelated business income taxes (UBIT) due with respect to the debt-financed portion of the property. This was addressed in The Motley Fool at http://www.fool.com/taxes/2000/taxes000908.htm

[Guest Gregory]

Just a few other issues to contemplate about owning real estate in the IRA...

Think of all the things you do as a property owner that now a custodian/trustee of the IRA will be responsible for. Ensure taxes are paid, insurance, property maintained, tenants, gas and electric, etc. They can do this themselves or hire a firm to do it. Who pays for all of this! The IRA of course. Evict a tenant? You guessed it...either the cust/ttee intervenes or hires someone (at the IRA's expense).

Sure the cust/ttee can contract with the account holder, but the ultimate responsibility lies with the property owner who, of course, would be sued if someone fell on the property because it wasn't shoveled. Think of the headlines and have fun

[mbozek]

Because of liability issues mentioned in the previous post (including environmental liability issues) which accrue to the trustee as the named owner of the RE (not the IRA owner) very few custodians will accept RE as an asset in an IRA and those that do charge high fees to cover the insurance for such laibility. The custoidan will not perform any tasks such as eviction, paying property taxes, etc unless it is paid a separate fee for managment of the the property. Legal fees will be assessed against the IRA assets.