Rental Properties in a RothIRA?

Question

Has anyone tried to put a rental property in a RothIRA?
For a RothIRA, my understanding is that your could put cash, stocks, mutual funds, bonds, real estate, as well as others assets.

With a RothIRA, you pay taxes on the asset upfront every year and are limited to the amount of money you are allowed to put in.

Once you hit the age of retirement, 59 1/2, all income from those assets are deferred from taxed?  Would that include rental properties monthly income?

Other thing I was thinking about is asset protection, if I were to ever be sued, would this asset be protected?

Also, how would repairs / improvements work?  Would I have to take it from my RothIRA account? Can I co-mingle my personal funds for repairs / improvements if the RothIRA doesn't have enough money to cover the expense?

Account Closed · Answer

Ace A.,  i think Tim Delp meant to say you CAN NOT put a rental propery into an IRA if you alrady own the property.that's a prohibited transaction...i think he had a typo..i think IRA's and roths are aweomse, but i actually think our tax code is favorable enough to rentals that there is little benefit to putting in an IRA or roth...i'm currently setting up a retirement account for myself, and mygoal is to lend out of it (small amounts to start)...with all the benefits of owning rental property such as deprectiation, interest write off, long term gains, 1031's, etc...i think it's better to own those in an llc and not in a retirement account

Will Barnard · Answer

Keep in mind that under the example of the flip with IRA owning 50% and you personally 50%, your IRA will incur UBIT as flipping is a competing business and not a passive investment. Check with your CPA on UBIT rules and taxation, it is very complicated and mixing in a partnership makes it that much more complicated, but of course, possible.

Steven Hamilton II · Answer

Ace A.,

I'm going to recommend doing some research on Roth IRAs to get some clarification as some of your information is incorrect.  Income is put into an IRA after paying tax.  These assets grow without incurring tax on the income. As long as the earnings stay in the account until 59.5 you will not pay any income tax on the earnings.

Your contributions to the Roth account are not deductible from your taxable income. You can pull your principal out after 5 years or upon reaching 59.5.  You cannot pull out the earnings without incurring a penalty until you reach 59.5.  Once you reach 59.5 you will not pay any tax on what is withdrawn and all assets grow without incurring tax.

Just as with any retirement account that can be garnished in a lawsuit, an IRA account is also subject to risk subject to any state limits.

Yes, many people have rental properties that were purchased inside their IRA.

NEVER co-mingle funds personally and with a Self Directed IRA.  All expenses in regards to the property must be paid from the Roth IRA. It must be paid from the IRA.

-Steven

Loren Whitney · Answer

@Samuel Ksiazkieicz
@Steven Hamilton II

That's right Sam! No gimmicks.

Thanks for chiming in Steven! Steven is spot on about income and expenses. You have to make sure to keep everything even (down to the penny). If you're going to involve your IRA in a deal, be sure to due your diligence and figure out what the IRA's expenses will look like in proportion to it's ownership.

Just a side note to keep in mind as you're thinking about IRA investments. Your IRA can also seek non-recourse lending in conjunction with your partnerships. They're a little harder to obtain when partnering with non-IRA entities but they're still a possibility.

Thanks!

Steven Hamilton II · Answer

Samuel Ksiazkieicz,

Yea you can partner with your SD IRA. Yes you can do that. It is recommended to set up a formal partnership and file a partnership return.

If you invest 50% personally and 50% from the IRA, you MUST pay any and all expenses equally.  Through this method you could contribute 65k from each entity and then use the funds left after the purchase to pay for expenses.

The key in my example is the initial investment stayed at the 50/50 contributions.  Any additional funds that must be invested must be 50/50 from each account(your personal and your IRA).  All profit must also be split 50/50 at this point as well.

I recommend a formal partnership to keep from having to put the property in your name.  But yes it can be done very easily and is becoming very common.

-Steven

Samuel Ksiazkieicz · Answer

@Loren ;
If Im reading you right it is legal to have my SD IRA as a "partner" when purchasing a house?
i.e.  I buy a 100k house, 50k from my personal bank acct, 50k from my roth.  I turn around and sell it for 150k.  I take put the original 50 back into my bank acct, pay taxes on the 25k profit (minus fees of course) and put the other 75k back into my roth, thereby gaining 25k in tax free profits?
And that can be done through my SD provider?  There isnt any CPA wizardry that needs to occur?  Seems too good to be true/easy!

Thanks

Will Barnard · Answer

As far as one of the OG questions regarding asset protection, the IRA funds are protected and seperated from all your personal holdings, even without the LLC added. Legal can correct me if I am wrong, but my understanding is that this protection is not silver bullet in that it could be added depending on what you have done.

Loren Whitney · Answer

Hey Ace! I think it's great you're researching the potential tax advantages of using your Roth IRA. I'm really surprised more investors haven't tapped into their retirement accounts for self-direction yet.

I commonly hear people say things like, "It's better to invest in real estate outside a retirement account". The reality is that every person has a different financial situation and what makes sense for one person, works poorly for another. Determining if a Roth IRA is right for you is the first step to take.

The beauty of an IRA is the tax-deferred or tax-free status that you receive. This can play a big role in your long term planning as it eliminates capital gains and the need for 1031 if you're paying cash. Using leverage in a retirement account does complicate things (ref: UBIT) but doesn't affect your personal credit or lending viability either.

If you're self-employed without employees, consider learning more about the individual(k) plan and it's Roth components. There are some added benefits to use in your comparison of options.

Just a note about SDIRAs. A "Self Directed IRA" is a descriptive term, not a legal distinction. You're really opening an Traditional IRA, Roth, etc. The key is finding a provider that will allow you to invest in the assets of your choice and supply a platform that makes the process as easy as possible. The financial industry has labeled non-traditional investments as "Alternative assets". I make this point because many brokerage companies offer self-directed IRAs and limit you to what they sell (stocks, bonds, funds etc).

When your IRA is involved in a real estate purchase, the IRA itself (an entity) is recorded on the deed. When an IRA is involved in real estate equity, it must be reflected as an undivided interest in ownership. For example, if you partner your Roth IRA with personal funds at the time of purchase (yes it's legal), and your Roth can only afford a piece of the deal (say 10%), the deed would reflect the IRA's 10% ownership along with the other owners. Contracts are commonly written as tenants in common in this example. The important takeaway from this, like someone else mentioned, is that the IRA's portion of expenses must be paid by the IRA and in proportion to the percentage of ownership. Therefore, planning for future expenses becomes a very important component or planning and gauging affordability. If your IRA runs out of money and can't afford to pay expenses, you may ultimately be forced to over contribute or distribute the asset and pay taxes.

If you consider using an LLC within an IRA, be sure to understand all the complexities and potential risks that follow.

Good Luck Ace!

Luis A. · Answer

Further clarification: it has to be a SELF DIRECTED IRA and you will need a custodian for it.

So really the first step is to set up a self directed IRA. Once you have it set up you can buy cattle with it if you want...

To answer Ace's question, once you have your self directed IRA you can purchase a rental property with those funds but you need to make sure that you have enough funds to cover repairs and other expenses. Everything has to come out of the IRA.

In terms of asset protection you can create an LLC for the IRA.

There are several companies out there that can help you set up and manage an self directed IRA for a fee of course. They can also explain all the details and rules.

Tim Delp · Answer

I'm assuming when you say put a rental property in your IRA you mean purchase a rental property with money inside your IRA?  If you already own a property you can put it in your IRA.  There might be some way where you could transfer up your annual limit of value in to your IRA each year but you would need a current value and subtract that value and would be very costly doing appraisals each year as well as I think easy transaction to cause your IRA to lose it's tax deferrred status if done wrong.

Most of your questions appear to have been answered in the 2nd response but a couple points to think about on whether to own in your IRA or not.

While a property in your IRA will cause you to avoid paying income taxes you will lose the ability to depreciate your property which for most is a great advantage and reason they like investing in real estate.

Also it is very difficult to obtain non recourse financing to leverage your purchase inside your IRA.  There are a few companies that offer it at competitive terms but they are very selective on their loans they will entertain.  Leverage is another great thing about investing in real estate and the terms and availability are much better outside of an IRA.  Also when you use leverage you get the further advantage of being able to write off the mortgage interest.

Since it appeared that one of your primary interest in owning inside the IRA was to avoid taxes I think it would be good to get a good understanding of what a typical cash flowing rental with leverage ends up looking like when you factor in depreciation and an interest write off.  Very likely to be cash flow positive but tax neutral.

Rental Properties in a RothIRA?

Most Popular Reply