Buying Investment Property With IRA Cash

Discussion in 'Financial Planning' started by Abby Brown, Apr 16, 2011.

  1. Abby Brown

    Abby Brown Guest

    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
     
    Abby Brown, Apr 16, 2011
    #1
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  2. Abby Brown

    JoeTaxpayer Guest

    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
     
    JoeTaxpayer, Apr 16, 2011
    #2
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  3. Abby Brown

    dapperdobbs Guest

    On Apr 16, 12:34 pm, JoeTaxpayer <> 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".
     
    dapperdobbs, Apr 16, 2011
    #3
  4. On Sat, 16 Apr 2011 10:34:06 CST, JoeTaxpayer
    <> 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.
     
    HW \Skip\ Weldon, Apr 16, 2011
    #4
  5. Abby Brown

    Don Guest

    On Apr 16, 5:30 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.  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.
     
    Don, Apr 16, 2011
    #5
  6. Abby Brown

    Abby Brown Guest

    "JoeTaxpayer" <> wrote in message
    news:iocct3$i9o$...
    > 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
     
    Abby Brown, Apr 19, 2011
    #6
  7. Abby Brown

    dapperdobbs Guest

    On Apr 19, 7:45 am, "Abby Brown" <> 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
     
    dapperdobbs, Apr 19, 2011
    #7
  8. "Abby Brown" <> wrote in message
    news:...
    > 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
     
    Gene E. Utterback, EA, RFC, ABA, Apr 19, 2011
    #8
  9. Abby Brown

    Don Guest

    On Apr 19, 4:45 am, "Abby Brown" <> 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.
     
    Don, Apr 20, 2011
    #9
  10. Abby Brown

    dapperdobbs Guest

    dapperdobbs, Apr 20, 2011
    #10
  11. On Tue, 19 Apr 2011 16:06:28 CST, "Gene E. Utterback, EA, RFC, ABA"
    <> wrote:

    >> 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.

    >
    >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.


    I agree on the self-dealing thing, but there are folks out there who
    insist it can be done with an attorney (more fees).

    Where it gets messy is that even if we can use pretax IRA money to buy
    the property, how would we handle ongoing expenses (taxes, insurance,
    utilities, repairs, maintenance, upgrades, etc.) on the IRA-owned
    house?
     
    HW \Skip\ Weldon, Apr 20, 2011
    #11
  12. Abby Brown

    JoeTaxpayer Guest

    On 4/20/11 9:41 AM, HW "Skip" Weldon wrote:

    > Where it gets messy is that even if we can use pretax IRA money to buy
    > the property, how would we handle ongoing expenses (taxes, insurance,
    > utilities, repairs, maintenance, upgrades, etc.) on the IRA-owned
    > house?


    Exactly. Even if the foreign location weren't an issue. Even if taking
    all 4 accounts (each of spouse's trad and Roth IRA) to make the
    purchase, one must still have enough liquidity within the larger account
    to keep all expenses coming from within the IRA. Uncollected rent,
    repairs, new roof, etc.

    I see ads for this type of investing "real estate in your IRA" and it
    just looks less than above board.
     
    JoeTaxpayer, Apr 23, 2011
    #12
  13. Abby Brown

    Alden01 Guest

    Owning property inside an IRA forfeits the traditional tax advantages of
    investing in real estate.




    --
    Alden01
     
    Alden01, Apr 25, 2011
    #13
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