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Cashing out inherited ira to buy real-estate
Here is my situation. I inherited an ira and had to set up an inherited ira, non spouse. I am wanting to cash this out and buy more properties. I talked to the company holding the ira and I don't have to pay the 10% penalty. I do have to pay state and federal taxes. I also realize I will be put into a higher tax bracket and be taxed as income.
How can I take this money and put it down on a couple properties and use them to negate the tax obligations?
Background information is that my wife and I have a high w2 income and also started an llc to mange a short term rental that we own. The str is coming along and isn't in a tourist area. We have it paying for itself right now. Still working on building that.
We live near a lot of hospitals and are planning on using this money to buy small multifamily properties and renting them medium term with traveling nurses. We have already had inquiries about turning the str into medium just for nurses. We would rather use money from the ira.
Any help and suggestions are greatly appreciated.
Also thanks to all the people that participate in the BP platforms. My wife and I owe everyone for the enlightenment into investing.
We are invested in Louisville Ky by the way.
Thanks,
Russell
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I had a pretty similar situation and this is my take on it. If your inherited Ira is 50k I would be comfortable cashing it out and paying the taxes on it. Having a high w2 will help as well. You can write off some of the taxes with the new property. Just be aware you could have a tax bill and to plan accordingly.
If you're cashing out 500K, that doesn't make sense to me. That will generate a massive tax bill. I can't see paying 100k plus in taxes. You will have to run the numbers, but its probably not going to make sense from a numbers perspective.
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A lot going on here @Russell Taylor (warrants more than a blog response) I would find a real estate specific CPA who is willing to take a legal yet effective approach to lower your tax burden
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Can you rollover the inherited IRA into a self directed ira or solo 401k(if you are self employed) and continue to defer?
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@Rick Martin Its an inherited IRA... so shouldn't be able to...
@Russell Taylor I guess it depends on your current tax bracket with your incomes. If you are already up into the higher brackets, then it won't make sense to take a bit out every year since it will be taxed at the same marginal rate...
Can't easily negate the tax obligations... We've had threads before where people think (or want to) they can use real estate deductions to offset their main/1040 tax liability. The tax deductions pitched for real estate is mainly to offset the rental income coming in... Also, if you have more deductions than income, i.e. losses, then normally it means you are losing money.
The primary way to go is with depreciation, since its a non-cash deduction. You can "generate" it if you purchase, either yourself or with others (e.g. syndication), a large property and do a cost segregation. But, this is a bigger "deal" and you potentiall get dragged into something you may not want so save a couple $10k's of taxes..
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Thanks for all the replies. It makes sense to pay the taxes and take it out. It's only $60k so what I would make on RE investments with that money over the next 10 years should be greatly more than it would in that account.
I also have an appointment with my tax person and Fidelity.
I can't thank this community enough for all they have done.
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Quote from @Rick Martin:
Can you rollover the inherited IRA into a self directed ira or solo 401k(if you are self employed) and continue to defer?
No, you can not rollover IRA that you inherited into your personal IRA or Solo 401k. Inherited IRA must remain to be inherited IRA. It remains to be in the name of the deceased. The beneficiary must distribute the entire IRA in 10 years.
However, you could convert an IRA you inherited into "self-directed inherited IRA" which would open up unlimited investment options, but you must still follow same distribution rules.
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Quote from @Dmitriy Fomichenko:I’m in the same situation and have the funds in an inherited IRA at the moment.However, you could convert an IRA you inherited into "self-directed inherited IRA" which would open up unlimited investment options, but you must still follow same distribution rules.
If I convert this to a self-directed IRA, do the same rules apply as if this was a ‘self-directed IRA?”
I am relatively familiar with the rule that myself nor immediate family can benefit from any property that the IRA has purchase.
My goal is to use all of the capital to purchase an apartment building. I’m after cashflow right now.
Would anyone care to chime in on this? TIA
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You can convert an Inherited IRA to a self-directed Inherited IRA. The IRA then can buy an apartment building. You and your immediate family members would be considered "disqualified" to the IRA; therefore, you will not be allowed to benefit from the IRA in any way nor provide any services to the IRA.
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Quote from @Dmitriy Fomichenko:
Quote from @Rick Martin:
Can you rollover the inherited IRA into a self directed ira or solo 401k(if you are self employed) and continue to defer?
No, you can not rollover IRA that you inherited into your personal IRA or Solo 401k. Inherited IRA must remain to be inherited IRA. It remains to be in the name of the deceased. The beneficiary must distribute the entire IRA in 10 years.
However, you could convert an IRA you inherited into "self-directed inherited IRA" which would open up unlimited investment options, but you must still follow same distribution rules.
This is a good strategy, then you can simply distribute the assets over that 10 year period as real estate properties.