Tahoe-Truckee Market Beat: Owning real estate in a retirement account
Special to the Sun
Most people work very hard to build up their retirement accounts. Years of saving and investing are normally required to build up a substantial nest egg.
Some people may consider investment alternatives with their retirement funds that include investing in real estate or even starting a small business.
If you’re thinking about using your IRA for real estate or a small business, I’d suggest being extremely careful. There are a number of caveats to be aware of.
According to an article in Kiplinger’s, there are three potential sources of aggravation.
The first one is that real estate investing already provides some significant tax benefits including the deduction of property taxes and mortgage interest. Owning real estate in an IRA negates those common deductions. You also won’t benefit from depreciation.
There’s also a very long list of prohibited transactions. You’re not allowed to live or work on your own property, so a property manager is required.
All funds invested in the property must come from the IRA account, and that includes maintenance and repairs.
If you violate any one of the rules, you could lose the tax-deferred status of your retirement account and have to pay significant taxes and penalties.
Getting a mortgage inside an IRA account can also be difficult, which means you won’t be able to use the leverage that a mortgage can provide — and of course you don’t get the mortgage interest deduction.
RMDs or required minimum distributions from an IRA can also get very complicated if you’re primarily invested in real estate and have to start withdrawing funds after you turn age 70.5.
If you’re thinking about investment real estate and don’t want to own it in your name for liability reasons, you might want to consider establishing an LLC to own the property.
An LLC can provide protection from creditors in the event of a lawsuit. Having the investment property held by an LLC can also make having a mortgage even more advantageous because the debt lowers your liability exposure.
Educate yourself if you’re considering using alternative assets with your retirement funds — it’s critical that you understand the complexities that can be involved.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.