payment of real estate tax

[betheeg]

Profit Sharing plan has partcipant directed accounts. 1 participant owns land. He pays the insurance premiums for the land from his assets, should he also pay real estate taxes from his assets?

Thanks.

[QDROphile]

Insurance premiums and real estate taxes for real property credited to an account should be charged to the account, not paid from the participant's assets.

[betheeg]

What do you mean by "charged to the account"? Charged to what account? I'm asking if he should pay with his plan assets like he's doing with the ins premiums for the land.

[Guest Pensions in Paradise]

How are the real estate taxes paid currently - by the participant personally or from the plan?

If the real estate taxes have been paid by the participant personally then you have a prohibited transaction. The real estate is a plan asset and thus all expenses associated with the real estate must be paid from plan assets. They CANNOT be paid by the participant personally.

You are obviously not qualified to provide advice to this client regarding this matter, so you should refer the client to qualified legal counsel.

[QDROphile]

By referring to amounts charged to an account, I was trying to avoid confusion about the reference to "his assets" in the original post. Amounts in a participant's plan account are not the participant's assets. Amounts in the account should be used to pay insurance premiums and real estate taxes relating to real property in the account. From your second post, it appears that insurance premiums have been paid from the account, not the participant's funds. Real estate taxes should be paid the same way.

[betheeg]

Thank you for the answer to my question, Pensions, however I find your last sentence a bit harsh.

This is the first year he has owned land under the plan and my only client that owns real estate under a plan. I assumed the taxes were paid with plan assets but wanted to be sure.

I thought these boards were here to get help and ask questions? We are a small firm and I use benefitslink when I cannot find answers in my resources. Also, many of my clients are small businesses that cannot readily afford legal cousel.

[betheeg]

Sorry for the confusion QDRO, and thank you for answering my question without making me feel like an idiot.

[Guest Pensions in Paradise]

Betheeg - you are correct in that these boards are designed for people to ask questions and get help. Which is what QDROphile and I did, we attempted to answer your question.

However, my concern is that it seems that there is an increase in the number of relatively simple questions posed by "advisors" on behalf of their clients. Hence my comment that if you don't know something, refer the client to someone who does.

Your post is the perfect example. Your only question was whether real estate taxes should be paid from the plan. What about UBTI? Or annual valuation requirements? Or bonding issues if the value of the real estate exceeds 5% of plan assets? If your client cannot afford legal counsel, then they shouldn't have real estate in the plan.

[Guest mjb]

PP: what provision in IRC 4975 prohibits payment of expenses outside of the plan? Under Reg 1.404(a)-3(d) employer payment of qualfied plan expenses may be a deductible expense,e.g. trustee fees. See Rev Rul 86-142, payment of plan brokerage fees by employer is permitted but is an additinal contribution to the plan. I dont know if there is a prohibition against payment of RE taxes by the employee whose account owns the RE but the employee will not get a tax deduction for such payments. Payment of RE taxes by employee could be regarded as an additional contribution to employee's account in the plan.

Betheeg: I agree with PP that IRA owners should not invest in RE unless they can afford qualified counsel because of the complex tax provisions that govern RE investments. Your inquiry is an excellent example of a Q that must be referred to tax counsel for a definitive answer to avoid problems for the plan. No one on this board can provide a correct ans.

[betheeg]

mjb-I also agree that this client should not own RE under the plan, but as I'm sure you know, some clients do what they want regardless of what advice they are given. I'm basically just trying to help out for now, but am shooting off a letter today with (again) the suggestion of legal counsel if they are to keep RE in the plan.

I agreed with PP's reponse, I just didn't like the pompous way he said it. There's a tactful way to say just about anything. Any question asked -no matter how simple - can lead to good discussion and be a learning experience.

[Guest Pensions in Paradise]

mjb - 4975©(1)(B) prohibits loan between disqualified person and the plan. My understanding is that any payments made by disqualified persons on behalf of the plan are treated as loans to the plan.

[Guest mjb]

Payment of plan expenses is not a loan if there is no obligation by the plan to repay employer. See Rev rul 86-142, plr 9252029. The prohibition is against the plan paying employer (settlor) expenses or the plan reimbursing the employer for payment of certain plan expenses. Employer payment of some plan expenses will not be deductible.