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Buying Investment Property With IRA Cash

 
 
Abby Brown
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      04-16-2011, 12:30 PM
Hi,

We are buying some property overseas. We are considering using
cash in IRA accounts so not to tie up other cash. Construction
will be completed in about 6 to 8 months (plus slippage). At
some point, after my wife retires, the property will become a
second home. At that time we want to "buy" it from ourselves
and put the cash back into the IRAs. Is this possible?

My wife and I each have an traditional and Roth IRAs with enough
total cash to cover the purchase. We plan to rent it out while
we aren't occupying it.

I did some research. You can use IRA money to buy property as
long as you don't use it yourself. You can then take it as a
distribution. I couldn't find if that applies to Roths, a
property overseas (in this case, Ecuador), or whether we can
transfer the property out of the IRA without taking it as a
distribution.

Thanks,
Gary

 
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JoeTaxpayer
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      04-16-2011, 04:34 PM
On 4/16/11 8:30 AM, Abby Brown wrote:
> Hi,
>
> We are buying some property overseas. We are considering using
> cash in IRA accounts so not to tie up other cash.



> My wife and I each have an traditional and Roth IRAs with enough
> total cash to cover the purchase. We plan to rent it out while
> we aren't occupying it.


This looks like an accident waiting to happen.
First, buying rental property is not a simple matter. Banks are hard
pressed to make loans against such property and expenses must be paid
for from within the IRA account. i.e. money shouldn't be flowing from
outside the IRA into it to provide any cash flow.
Next, I'm sure there are those with expertise in this, but the fact that
you will need to mix funds, both yours and the wife's and also mix
traditional and Roth IRA money all sounds like it's too easy for the
IRAs to be considered broken.
Last to do this for a property overseas that you intend to then move
into implies a level of self dealing that I don't know if it will pass
the rules regarding such matters.

I look forward to seeing other input here. I can't imagine the answer
being simple.
Joe

 
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dapperdobbs
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      04-16-2011, 07:17 PM
On Apr 16, 12:34*pm, JoeTaxpayer <(E-Mail Removed)> wrote:
> On 4/16/11 8:30 AM, Abby Brown wrote:
>


> > We are buying some property overseas. *We are considering using
> > cash in IRA accounts so not to tie up other cash.


>
> I look forward to seeing other input here. I can't imagine the answer
> being simple.
> Joe


I'm not good with IRA accounts at all, so waited for someone else to
lead off on the replies. The OP's opening lines above wave a huge red
flag to me. IRA accounts as I understand them are generally considered
a preferred category of capital, as gains declarations are deferred.
Buying property overseas can be problematic (Ecuador's politics are
not like the U.S. you know - the government there can just reach out
and take your stuff, ask any company or farmer in Venezuela - even in
Spain, an English couple lost a 350k newly constructed retirement
house, their only residence, to demolishment, because the construction
license was rigged). Thinking of using IRA cash instead of other cash
sounds like either a misconception or a mismanagement issue that
should be addressed before getting into esoterics (like figuring taxes
that will be due in Ecuador for U.S. citizens resident there, and
combined taxes on rental property in the interim). If the thought is
to invest in Ecuador through the IRA, thus avoiding whatever early
withdrawal fees may be involved in taking out cash, I doubt IRA rules
will allow a house in Ecuador as an investment. Closer would be a
rental property here in the U.S., but does it make sense to depreciate
in a tax deferred account?.

Use the "other cash".

 
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HW \Skip\ Weldon
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      04-16-2011, 09:04 PM
On Sat, 16 Apr 2011 10:34:06 CST, JoeTaxpayer
<(E-Mail Removed)> wrote:


>I look forward to seeing other input here. I can't imagine the answer
>being simple.


Agreed. Based solely on the limited info presented, this appears to
be another instance of buying something someone can't afford. My
sense is that,again, based on limited info presented, OP is better
served by finding a way out rather than finding a way to proceed.

 
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Don
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      04-16-2011, 10:09 PM
On Apr 16, 5:30*am, "Abby Brown" <(E-Mail Removed)> wrote:
> Hi,
>
> We are buying some property overseas. *We are considering using
> cash in IRA accounts so not to tie up other cash. *Construction
> will be completed in about 6 to 8 months (plus slippage). *At
> some point, after my wife retires, *the property will become a
> second home. *At that time we want to "buy" it from ourselves
> and put the cash back into the IRAs. *Is this possible?
>
> My wife and I each have an traditional and Roth IRAs with enough
> total cash to cover the purchase. *We plan to rent it out while
> we aren't occupying it.
>
> I did some research. *You can use IRA money to buy property as
> long as you don't use it yourself. *You can then take it as a
> distribution. *I couldn't find if that applies to Roths, a
> property overseas (in this case, Ecuador), or whether we can
> transfer the property out of the IRA without taking it as a
> distribution.
>
> Thanks,
> Gary


If you could get around the complexities of buying rental property
inside an IRA, it still could be a good investment. Consider using
that "other cash" you mentioned to make the purchase. But do plenty of
research before buying. By all means do not fall for some ad in a
magazine saying "Great opportunities for property in Ecuador" or
something like that. I would never buy property (or land) in Ecuador
without spending time there and becoming familiar with that country.
Same for Costa Rica or anywhere else. When you said "construction will
be completed in 6 to 8 months," that to me is a danger signal. And the
same care and attention that you would pay to checking out the
condition of the property, negotiating with the buyer, getting the
lowest mortgage rate possible, etc., if you bought in the USA, also
applies to any foreign transaction.

 
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Abby Brown
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      04-19-2011, 11:45 AM

"JoeTaxpayer" <(E-Mail Removed)> wrote in message
news:iocct3$i9o$(E-Mail Removed)...
> On 4/16/11 8:30 AM, Abby Brown wrote:
>> Hi,
>>
>> We are buying some property overseas. We are considering
>> using
>> cash in IRA accounts so not to tie up other cash.

>
>
>> My wife and I each have an traditional and Roth IRAs with
>> enough
>> total cash to cover the purchase. We plan to rent it out
>> while
>> we aren't occupying it.

>
> This looks like an accident waiting to happen.
> First, buying rental property is not a simple matter. Banks
> are hard pressed to make loans against such property and
> expenses must be paid for from within the IRA account. i.e.
> money shouldn't be flowing from outside the IRA into it to
> provide any cash flow.
> Next, I'm sure there are those with expertise in this, but the
> fact that you will need to mix funds, both yours and the
> wife's and also mix traditional and Roth IRA money all sounds
> like it's too easy for the IRAs to be considered broken.
> Last to do this for a property overseas that you intend to
> then move into implies a level of self dealing that I don't
> know if it will pass the rules regarding such matters.
>
> I look forward to seeing other input here. I can't imagine the
> answer being simple.
> Joe


Oh well, it was a thought.

We just returned from a trip to Costa Rica and Ecuador. We
found two retirement properties that will provide a comfortable
lifestyle. Both are good investements plus the potential to
rent one while occupying the other. They two properties
together would be less than half our net worth. Affordability
is not an issue.

Interest rates in Latin America are high so these will be cash
deals. By happenstance, we have a lot of cash doing nothing in
our IRAs so we would not have to liquidate any assets. We could
take the cash from the traditional IRAs as distributions but not
the Roths. We want to keep their tax free status. I was hoping
there was some clever way to "borrow" the cash in the Roths
(about $200K) until we sell our house when my wife retires in a
year and a half. That was a long shot but it never hurts to
ask.

Thanks for the responses,
Gary

 
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dapperdobbs
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      04-19-2011, 07:22 PM
On Apr 19, 7:45 am, "Abby Brown" <(E-Mail Removed)> wrote:

> Oh well, it was a thought.


Forgive me for 'butting in' here - you replied to Joe Taxpayer. Pursue
it a bit further here - I can't reply to the specific IRA questions,
but others here may be able to. It very rarely hurts to get
communication and ideas on something. Some other considerations are
what I'm trying to offer.

> We just returned from a trip to Costa Rica and Ecuador. We
> found two retirement properties that will provide a comfortable
> lifestyle. Both are good investements plus the potential to
> rent one while occupying the other.


Do you have 100% legal advice on paper both there and here? You need
hard paper before signing anything. (I am bad with real estate. I get
wrapped up in the NEW house emotional thing and the POWER of buying
and all the things I can "easily" do to get things just the way I want
them. That means I do not do an objective analysis. Be careful - once
your cash is handed over it is hard to get it back, you know?) You're
handling a lot of life-changing stuff here with a lot of personal skin
in the game.

> The two properties
> together would be less than half our net worth. Affordability
> is not an issue.


No, but viability IS an issue. Don't get caught in a power trip. Some
very wealthy people are real tightwads and do not part with a penny
easily. Do not treat "less than half [your] networth" so cavalierly.
That's a lot of Susie's lemonade there.

> Interest rates in Latin America are high so these will be cash
> deals.


Again, your personal legal department: make sure you have a squeaky-
clean title to the house, the floors, the land, and the sky above it.

> By happenstance, we have a lot of cash doing nothing in
> our IRAs so we would not have to liquidate any assets.


'Natch I don't know your specifics, but the investments should have
been in the tax deferred IRA's IF the idle cash were outside the
IRA's, how would you proceed? Trying to correct a situation is
sometimes possible, but keep the objectives straight. Avoid creating
additional problems - make sure the 'fix' will work.

> We could
> take the cash from the traditional IRAs as distributions but not
> the Roths. We want to keep their tax free status. I was hoping
> there was some clever way to "borrow" the cash in the Roths
> (about $200K) until we sell our house when my wife retires in a
> year and a half. That was a long shot but it never hurts to
> ask.


You do not know for sure that you cannot proceed with your idea. I've
seen it floated around by professional writers on real estate pages on
the web. Pay the $350 an hour for a good attorney here - you're not
suing anyone, you just want some legal advice on what you can and
cannot do with your funds.

> Thanks for the responses,
> Gary


 
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Gene E. Utterback, EA, RFC, ABA
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      04-19-2011, 10:06 PM

"Abby Brown" <(E-Mail Removed)> wrote in message
news:(E-Mail Removed) m...
> Hi,
>
> We are buying some property overseas. We are considering using cash in
> IRA accounts so not to tie up other cash. Construction will be completed
> in about 6 to 8 months (plus slippage). At some point, after my wife
> retires, the property will become a second home. At that time we want to
> "buy" it from ourselves and put the cash back into the IRAs. Is this
> possible?
>
> My wife and I each have an traditional and Roth IRAs with enough total
> cash to cover the purchase. We plan to rent it out while we aren't
> occupying it.
>
> I did some research. You can use IRA money to buy property as long as you
> don't use it yourself. You can then take it as a distribution. I
> couldn't find if that applies to Roths, a property overseas (in this case,
> Ecuador), or whether we can transfer the property out of the IRA without
> taking it as a distribution.
>
> Thanks,
> Gary



You can't do this - not only will it violate the self dealing rules it will
almost certainly throw off Unrelated Taxable Business Income, meaning you'd
have to pay tax on the income even though it was inside an IRA. Very bad,
very very bad. Don't do it.

Gene E. Utterback, EA, RFC, ABA

 
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Don
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      04-19-2011, 11:50 PM
On Apr 19, 4:45*am, "Abby Brown" <(E-Mail Removed)> wrote:

> We just returned from a trip to Costa Rica and Ecuador. *We
> found two retirement properties that will provide a comfortable
> lifestyle. *Both are good investements


How do you know that? I could be way off here, but when you said the
property will be completed in 6-8 months, I was led to believe you
might have attended a sales presentation for a development in
progress. If that is true, probably the risk you are taking is as
great or greater than the difficulties that could come from using IRA
money. Make that time frame 12 to 16 months or longer. And if the
"good investment" notion came from a sales person, I would believe the
earth is flat before I believed it. In my opinion, buying property in
a remote location will work to your benefit only if conducted in the
same way as buying in your home town. And that means with legal
advice, lots of research, independent appraisal by someone of your own
choice, home inspection by a qualified engineer if possible, and
healthy skepticism about anything an owner or real estate agent tells
you.

 
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dapperdobbs
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      04-20-2011, 01:36 AM
The link below seems to substantiate what Gene said about self-
dealing:

http://realestate.msn.com/article.as...2690&GT1=35010

 
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