Real Estate as plan asset

[Gary]

I've never been a fan of real estate as a plan asset for all sorts of reasons, but plan sponsors of one participant plans love to do it.

I have a husband and wife plan. They have plan assets of 400k where such value is based on a real estate property.

The lump sum value of each of their pensions is 200k if they terminate the plan today.

Can they re-title the asset as an IRA asset of 200k (50% of real estate) each for 2 separate IRA accounts?

I suppose if a financial institution allows for such an arrangement it might work.

And finally what about expenses and rental income; could they go in and out of the IRA account or must that be part of an after tax account? It seems it should be part of the IRA account though it is a little quirky.

Of course no one wants to sell their depreciated real estate these days.

Like I said, I'm not a fan of real estate in pension plans.

Thanks.

[Guest Sieve]

Why not? Each IRA would thus be receiving half of the value of the real estate (supported by a current valuation and an appropriate 1099-R, of course)--which, apparently, equals their distribution. That assumes you find someone who will do this (although there are trustees out there who will hold real estate in an IRA).

But, just as rental income MUST go into the IRAs--as it should have in the qualified plan, so how come there's no cash in the plan?--so must expenses come out of the IRA. If there's no cash in the qualified plan, and there is no IRA money elsewhere, then where does the cash come from to pay expenses & taxes (if rental income is not high enough, especially at the start)? An after-tax account cannot pay expenses of the real estate held by the IRA--although IRA contributions made to the plan could be used for that purpsoe.

Aside: if this is a DB plan, I hope the real estate does not represent a contribution to the plan!

[AndyH]

Doesn't the rental income generate unrelated business income subject to tax? How does that work with an IRA?

[Gary]

Good points.

It is a DB plan, but the real estate was not a plan contribution.

Yes, there will need to be cash in IRA or pension plan to cover expenses as you say, if the rental income does not suppport the expenses.

The plan does have some cash as well, I just didn't address that in my original question.

Thanks.

[J Simmons]

Doesn't the rental income generate unrelated business income subject to tax? How does that work with an IRA?

If the IRA custodian hires a real estate management company, then the net rent to the IRA is passive and ought not be UBTI.

[JAY21]

There is an exception to the unrelated business income tax for real property rental income in qualified plans (and presumably IRAs as well) for most situations, though certain debt-financed property, if the mortgage is not a standard mortgage type, can trigger the UBIT rules.

[AndyH]

There is an exception to the unrelated business income tax for real property rental income in qualified plans (and presumably IRAs as well) for most situations, though certain debt-financed property, if the mortgage is not a standard mortgage type, can trigger the UBIT rules.

Thanks. It was the debt financing issue I was remembering. It's been many years fortunately since I worked with plans invested exclusively in real estate (co-owned by the Trustee personally), classic automobiles (driven by the Trustee) , or paintings (on the wall in the office of the Trustee).

[Guest Sieve]

Jay --

I think real property rental income is generally exempt from UBTI (IRC Section 512(b)(3)), and debt-financed property can be held, without being subject to UBTI, by a qualified plan but not by an IRA (IRC Section 514©(9)(A) & ©).