Buying real estate with my Roth

[Guest wdgator]

I invest in homes and have to pay capital gains taxes on the sale, etc. I recently found out I can buy my homes by paying the down payment from my Roth and due to this will never have to pay capital gains taxes on properties purchased through my Roth. How does this work? Where can I get additional information on this entire process since my broker is leary of course, but I think I know why he feels the way he does, and that is losing commissions on something that may be a great idea. Thanks in advance. wd

[jpod]

I'm not attempting to answer your questions, because it's too complicated and you shouldn't be looking for guidance on such serious matters from a message board. I am curious, however, if you invest in residential real estate through your Roth IRA, how will you invest your non-Roth money? Will you invest your non-Roth money in investments that produce ordinary income or in other capital gain-producing investments? It seems to me that if you don't want to pay capital gains taxes on your real estate you should be exploring 1031 exchanges, and save your Roth for more traditional investments.

[Kimberly S]

You mentioned paying the down payment from the IRA. If you are anticipating only paying the down payment from the IRA and making the mortgage payments from some other source, it is unlikely that the property can be considered to be owned by the IRA.

[Guest mjb]

Just how much money do you plan on investing? And as noted you will need to pay for expenses and maintenance costs from the IRA. Also your IRA cannot pay you to manage the property or perform other services related to the home. Finally you need to ask your tax advisor if the roth approach is good idea since you will be giving up all of the tax benefits that accrue to individual owners such as depreciation, deduction of interest expenses, maintenance costs, property taxes, etc.

[John G]

You have just entered the "danger zone". All of the above cautions apply, and more.

What may be allowed, specificly prohibited, or questionably legal when it comes to ANY non-traditional investment in an IRA or Roth are complicated questions. This is not a do-it-yourself area. You can run into legal barriers and practical business problems. As mentioned above, you need to consult with an accountant and tax lawyer. You can find out more about these issues by doing a search on "real estate" on this message board, but again, do not rely upon what your understanding of what you read here.

On a practical level, you need mega bucks in a IRA/Roth to even consider non-traditional investments. You will also need to find a custodian who will support the investment... custodians will veteo things that they think are illegal or not prudent (such as concentrated investments) or that they can no conveniently track/manage. Expect to pay higher annual fees for any non-traditional investment. Expect consulting expenses on tax advice.

You lose the ability to take any write-offs on losses. You are likely to have greater difficulty obtaining financing.

It is generally not a good idea to restructure your affairs for tax reasons, especially when you are talking about avoiding long term capital gains which are taxed at the lowest levels.

[Ron Snyder]

The result of prohibited transaction in a Roth IRA is disqualification of the IRA. (The prohibited transaction may occur in lending your credit to the Roth IRA.)

This may result in double taxation of the amount inside the Roth IRA.

A Roth IRA may permissibly invest in real estate:

1. If the Roth IRA can purchase a parcel of real estate without a mortgage;

2. Through purchase of a fractional interest in the real estate through an unrelated entity (not a disqualified person) which pools funds together for such purchase (but watch out for securities laws).

3. A situation to which your ERISA counsel advises is ok.

In my experience, real estate investors are so greed-motivated that they are too cheap to pay for legal counsel before they get into trouble, preferring to rely on the advice of amateurs who tell them what they want to hear.

I am an attorney who hears regularly from real estate investors who want to get around the laws rather than comply with them.

[John G]

Verba... you hit the nail on the head.

Amen!