1031 exchange with an inherited IRA?

[Patrick Gerrity]

I have money in an inherited IRA account, that I am pulling out to purchase an investment property. Does this type of purchase meet the requirements of a 1031 exchange? This purchase will significantly raise my tax liability at the end of the year, as it will bring my income into the 33% plus tax bracket at least. I am just trying to figure out how to mitigate that major tax bill at the end of this year. Does anyone have any advice on this, or some other type of strategy to mitigate that? Thanks!

[Dmitriy Fomichenko]

Patrick,

if you are taking a distribution from your inherited IRA - you will be taxed on the entire distribution amount. Taking money out of an IRA and using proceeds to buy an investment property would not meet the requirements of 1031 tax deferred exchange.

You can avoid paying taxes by setting up self-directed inherited IRA and then investing in real estate from your IRA. This would not be taxable event so no tax liability to you. Then you can continue to take small distributions from your self-directed inherited IRA and only pay taxes on the distribution amount.

Further, if you decide to sell that property and reinvest into another investment you don't have to do the 1031 exchange since you are doing so inside of a tax-sheltered vehicle (IRA).