IRA to RIRA Advice

February 16, 2009 7:26 PM

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.

posted by JPowers to work & money (5 answers total)

I can't answer ANY of the above except: What are the pitfalls that you see?

1. Is there some RIRA clause or rule that states something about children, spouses, parents?
2. Is he SURE that he wants to use his retirement funds(something he has saved for his whole life) to fund your brother's house (who is, compared to your dad, just starting out).
3. Just in case your brother can't pay rent anymore (due to any number of unfortunate events that I hope don't happen), would he be able to find another renter at the same or rate or greater?
4. This is a mutually beneficial business arrangement between your dad and brother (with you kinda involved since you know all the details...I can only guess). They are putting their relationship on the line doing this.

I know that its great for your brother (who is probably getting a good deal) and your dad (who is using his IRA to make real estate money, but can they work together on this and realize its mutually beneficial and not just say "well this is a better deal for you than for me"?

Besides that...as someone who knows very little about IRAs and even less about RIRAs, I think you have a clever little family.
posted by hal_c_on at 7:39 PM on February 16, 2009

There's a reason people get paid a lot of money to answer these questions. Please contact an accountant or tax attorney. If you are in VA or DC, I can give you a great referral.
posted by Ironmouth at 7:46 PM on February 16, 2009

Ok. So I did a little bit of researching. I know nothing about these sites, so take this advice at your own risk.

This site explicitly says: You cannot rent the house to your spouse or your ascendants or descendants -- grandparents, parents, children, grandchildren, etc., but you could rent it to your brother or sister while it's in your IRA.

I say check the loads of documentation on the IRS website...and even better than hiring a high-priced attorney/accountant...is to call up the IRS (after their busy season, of course) and find someone who can answer this for you. I mean they are the people who will restrict stuff, so if you want to avoid red tape...go straight to them to see how you can make this work for you.
posted by hal_c_on at 7:50 PM on February 16, 2009

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

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