IRA/LLC vacation rental property question

[George Knight]

My wife and I have a few rental properties and are interested in purchasing more. Today, we toured a property that would make a great, unique vacation rental property. We are currently in the process of buying another triplex and don't currently have the down payment in our checking account to also purchase this potential vacation rental property. My wife has enough in one of her rollover IRA's to either make the down payment or purchase the property outright through a self-directed IRA/LLC. The problem is that we would eventually like to own and stay in this property. Is there any way that next year (after we save up for the down payment) that we could somehow personally purchase the property from our IRA/LLC? Is this always considered a transaction between disqualified individuals, or does anyone know a way that it can done? We plan to talk to our CPA and lawyer, but I wanted to see if anyone here had any feedback.

[Brian Eastman]

@George Knight

An IRA is never a good means to finance something you want personally. Such vehicles are all about diversification and the ability to place some of your tax-sheltered savings in investment vehicles beyond just what Wall St. offers. You do not choose to invest in stock of say, Apple, with the aim of one day taking that Apple stock out of your IRA to yourself. Real estate is the exact same concept.

As disqualified parties to your IRA, neither you, your wife, or lineal family can use or purchase a property held by her IRA.

The only way to access a property personally is to take the property as a distribution in-kind from the IRA. This involves having the property appraised, and then titling the property from the IRA to you. The full value of the property will be taxable income, added onto your other taxable income for the year. If your wife is under the age of 59 1/2 at the time of distribution, there will be an additional 10% penalty. Expect to be in a very high tax bracket.