Investing in Real Estate

[Archimage]

Have any of you looked into the method of investing in personal real estate "outside" of the IRA? I can find lots of articles saying it is great but I can't find anything that downplays it.

[Ron Snyder]

You're on an IRA thread and asking about investing in real estate "outside of the IRA"? What does this even mean? A personal purchase of real estate? What does this even have to do with IRA? Your post is unclear. Perhaps if you cited one or more of the myriad of articles you refer to, it would be clearer.

[Archimage]

No problem. Here are a couple.

http://www.urangafinancial.com/sub_inside_outside/intro.php

http://www.escapehomes.com/articles/Using_...Real_Estate.htm

I have seen this before but I have never been able to find anything written up against this type of transaction. Sounds agressive to me.

[jevd]

It appears that the OUTSIDE method involves distributions from the IRA with some sort of tax offset created by the Real Estate transaction. I had to dig through all of the material to finally find a statement to that effect. I'm not a CPA so I'm not sure if it's legit but there is never any free lunch. Even if mom makes it.

[Guest mjb]

Investing Outside. Translation- Using an IRA distribution to purchase RE in owner's name after paying income taxes on the distribution. Otherwise its a PT to use IRA assets to purchase a residence in which the owner will live.

[jevd]

To the Accountants oout there.

What offsets would over ride the taxation of the distribution. This seems like a sales pitch without disclosure to me.

[John G]

To all readers:

This is another one of those periodic real estate posts that pop up every three months. Real Estate investing is typically beyond the IRA/Roth resources of most folks who visit this message board. In addition, there are major legal impediments. Just for fun, let's throw in the loss of tax write-offs associated with real estate. Oh, and anything that unusual or related to "self directed" means significantly higher custodial fees. In an IRA, that long term capital gain reverts back to ordinary income at higher taxation. You must have enough assets in your IRA to cover all of you expenses (taxes, repairs, etc.) And... that darn housing bubble.

Still interested.... well, try a search on "real estate" and read the 100+ posts from prior years. You have had about 10 accountants and tax professionals more or less say forget about it.

This is what Money magazine said in a March 2005 article: "rules are complex... stakes for running afoul of them are high. A misstep can disqualify your IRA's tax deferred status (triggering taxes and penalties).... an individual can't personally guarantee a IRA loan... few banks will lend money to an IRA, if you pay cash you give up leverage." They quote a self directed IRA custodian (Pensco Trust) that less than 1% of their nearly 3 trillion in IRA assets involve real estate. (I would guess some of those $$ were in REITS) They provided two examples of folks who bought buildings for cash using Entrust Administration as custodian. One was a home remodeler.

If still want to proceed, you are going to need sophisticated professional help to define the boundaries to real estate investing. You will need a custodian, accountant and lawyer with knowledge in this field. You should expect to pay fees for transactions and advice in the thousands of dollars each year.

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Disclosure: I have nothing against real estate investing. I currently participate in six different real estate Limited Partnerships involving offices, retail, and apartments and I am reviewing a upcoming deal in Germany that involves retail shops. Some of these have performed well. But none were suitable for an IRA or Roth.