IRA to RIRA Advice
February 16, 2009 7:26 PM Subscribe
My Dad wants to roll his IRA over to an RIRA and use the money to buy my brother a townhouse. Is this a bad idea?
The Facts
The Facts: My dad wants to roll over an Individual Retirement Account (IRA) to a Real Estate IRA (RIRA). He will use the RIRA to purchase a townhouse for a total cost of $220,000 (this will be the only asset owned by the RIRA). All RIRA financial commitments, debits, and credits shall be recorded on the RIRA account ledgers. There will be no mixing of RIRA funds and personal funds. He plans to rent the townhouse to my brother for $1,554 per month. The rent will be calculated as shown here. In a nut shell, my brother will pay rent each month equal to the reoccurring monthly expenses (tax, insurance, etc.) plus 3% interest.
The Questions
- Would this be considered a prohibited transaction by the IRA?
- When the townhouse is eventually sold and the funds are in the RIRA, can my Dad roll them over to an IRA?
- Can he take distributions from the RIRA?
- Can he manage the rental or does it have to be someone else? In other words, can he be the one responsible for finding tenants, arranging leases, getting insurance, making repairs, or would this be prohibited by the IRS?
- Bottomline: Is this a bad idea? Is this too risky? What are the pitfalls that you see?
Thanks in advance for any help you can give us.
The Facts
The Facts: My dad wants to roll over an Individual Retirement Account (IRA) to a Real Estate IRA (RIRA). He will use the RIRA to purchase a townhouse for a total cost of $220,000 (this will be the only asset owned by the RIRA). All RIRA financial commitments, debits, and credits shall be recorded on the RIRA account ledgers. There will be no mixing of RIRA funds and personal funds. He plans to rent the townhouse to my brother for $1,554 per month. The rent will be calculated as shown here. In a nut shell, my brother will pay rent each month equal to the reoccurring monthly expenses (tax, insurance, etc.) plus 3% interest.
The Questions
- Would this be considered a prohibited transaction by the IRA?
- When the townhouse is eventually sold and the funds are in the RIRA, can my Dad roll them over to an IRA?
- Can he take distributions from the RIRA?
- Can he manage the rental or does it have to be someone else? In other words, can he be the one responsible for finding tenants, arranging leases, getting insurance, making repairs, or would this be prohibited by the IRS?
- Bottomline: Is this a bad idea? Is this too risky? What are the pitfalls that you see?
Thanks in advance for any help you can give us.
Real estate IRAs are something to approach with caution, especially since the real estate market is still in meltdown in many parts of the country.
That said, what he wants to do isn't legal, either. You can't buy and sell property to your IRA, loan or borrow money from it, and you also can't receive or provide services from/to the IRA. Directly, or indirectly. So a family member or business partner can't benefit from the investment. Since your brother would pay rent, that might be good, but your father can't do any of the labor on the place himself; that's providing a service to the investment.
The penalty, I'd guess, would be having to pay the early withdrawal penalty on all of the money, among other things.
Seriously, this is something for a professional attorney, not for MeFi? Good luck.
posted by talldean at 8:53 PM on February 16, 2009
That said, what he wants to do isn't legal, either. You can't buy and sell property to your IRA, loan or borrow money from it, and you also can't receive or provide services from/to the IRA. Directly, or indirectly. So a family member or business partner can't benefit from the investment. Since your brother would pay rent, that might be good, but your father can't do any of the labor on the place himself; that's providing a service to the investment.
The penalty, I'd guess, would be having to pay the early withdrawal penalty on all of the money, among other things.
Seriously, this is something for a professional attorney, not for MeFi? Good luck.
posted by talldean at 8:53 PM on February 16, 2009
Do yourself a favor and skip the hive mind on this one. You need a professional real-estate attorney with experience with self-directed IRAs invested in real estate. Not someone who knows one but not the other. Missing a dot on an i or a cross on a t, given the amounts of money involved, could mean a substantial tax liability.
call up the IRS ... and find someone who can answer this for you
Unfortunately, this is horrible advice. The IRS is notorious for giving out wrong answers for much simpler questions. The people who answer their phones are not much more knowledgeable about taxes than the people who answer the phones at Citibank are about high finance. I'd trust them slightly better than the well-meaning drones of H&R Block, but that's about it.
The only professional you can ultimately trust would be a tax attorney who has professional incentives to keep up with changing tax law and especially tax case law.
posted by dhartung at 10:30 PM on February 16, 2009
call up the IRS ... and find someone who can answer this for you
Unfortunately, this is horrible advice. The IRS is notorious for giving out wrong answers for much simpler questions. The people who answer their phones are not much more knowledgeable about taxes than the people who answer the phones at Citibank are about high finance. I'd trust them slightly better than the well-meaning drones of H&R Block, but that's about it.
The only professional you can ultimately trust would be a tax attorney who has professional incentives to keep up with changing tax law and especially tax case law.
posted by dhartung at 10:30 PM on February 16, 2009
« Older Recipe for truly succulent, traditional Jewish... | Good spots to take pictures in Marin? Newer »
This thread is closed to new comments.
posted by Ironmouth at 7:46 PM on February 16, 2009