Real Estate Rollover?

[TBob]

I have read many of the post on this message board that talk about real estate in an IRA or qualified plan. I agree that in most cases, it's not a good idea. The specific question that I have is can a participant directly roll real estate held in their 401(k) plan to an IRA?

Assume for purposes of this question that the document allows for in-kind rollovers and that the participant has an IRA custodian that would accept/hold real estate in the IRA.

[namealreadyinuse]

Yes. IRA contributions have to be cash only, but rollovers can be in-kind if it is an asset that IRAs can hold, which real estate is. Make sure that there is enough cash in the IRA as well to cover all ongoing expenses, because the IRA contribution limits are so low that they sting a lot of these deals.

[Guest allancoleman]

Although " rollovers can be in - kind .... , which real estate is " , and " your custodian that would accept / hold real estate in the IRA " , the IRS may take a different view of your transaction . Keep in mind while you're putting real estate in your IRA that the IRS considers " Prohibited Transactions " as :

" Brorrowing money from it "

" Selling property to it "

" Receiving unreasonable compensation for managing it "

" Using it as security for a loan "

" Buying property for personal use "

These are just a few examples . " Effect on an IRA account " :

" Generally , if you or your beneficiary engages in a prohibited transaction in connection with your traditional IRA account at any time durning tha year , the account stops being an IRA as of the first day of that year " . " If your account stops being an IRA because you or your beneficiary engaged in a prohibited transaction , the account is treated as distributing all its assets to you at their fair market value on the first day of the year " . This means you will have to pay income taxes on that full distribution in that tax year . For your further research , most of the above comes from the IRS publication 590 , page 41 .

I've bought , owned , rented , and sold real estate in personal accounts and it has been an excellent investment with generous tax deductions that are seldom restricted or prohibited . I would figure some other way to take assets out of your deferred accounts including leaving this real estate in your 401(k) and / or buy real estate in a personal account with all the tax advantages that go along with it . Also keep in mind , " if you have a loss in your traditional IRA , you can recognize ( include ) the loss on your income tax return , but only when all the amounts in your traditional IRA accounts have been distributed to you and the total distributions to you are less than your unrecovered basis , if any " . Which means you would have to totally close your IRA account in order to claim losses against it . Whereas , in a personal account , I can deduct those losses against income alot easier . Please see page 38 in the same IRS publication 590 for further details on this restriction on losses in a IRA .

Just my opinion . And I'd make sure I had all the details checked and signed off by a qualified CPA and this isn't the kind of transaction I'd attempt by myself by asking this question on any message board . Even one as excellent as this one is . And when you look for the correct IRS publication , keep in mind that the most recent one is dated for use in preparing 2005 returns . I have it in front of me now as I type this reply . A newer one should be available in a month or so for tax year 2006 . Then , the page numbers may be different .

Good luck on your desired rollover / transaction .

[John G]

Here we go again.... (to paraphrase a former President) I copied from a prior response on real estate and it applies rollover or otherwise...

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.

- - -

Disclosure: I have nothing against real estate investing. I currently participate in six different real estate Limited Partnerships involving offices, retail, and apartments both in the USA and Europe. These have performed well. But none were suitable for an IRA or Roth.

[TBob]

Thank you for all of your input. As I mentioned when I started this post, I have read many of the prior posts on Real Estate in an IRA including the one copied by John G which was very helpful. I agree with all of the prevailing wisdom that this is probably not a good idea. I would never recommend this to anyone especially since it is well beyond the scope of my expertise.

I needed to know specifically if RE could be rolled over in kind to an IRA. I have my answer...

Thanks again!