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Is Real Estate Right for your IRA?

Is Real Estate Right for your IRA?

With all the rhetoric surrounding a possible real estate bubble, writing about real estate investing at this time seems to fly in the face of conventional wisdom. Well, we at Apollo have never been shy about taking a contrarian view.

Please don’t misunderstand – we’re not suggesting anyone rush out and plunk down a good chunk of change into investment property.

Rather, we thought we’d write about a form of direct investing that’s growing in popularity: owning real estate in an IRA.

Owning property in an IRA sounds like a great idea. Real estate kicks off lots of ordinary income so why not own it in a tax-deferred account?

First, let’s be clear about what we’re talking about. Plenty of us own REITs/REOCs, real estate mutual funds, realty ETFs, homebuilder stocks, etc. in our IRAs. That’s fine. What we’re talking about are actual properties – rental units, condos, apartment buildings, etc.

Properties like these can be quite the headache. Owning these properties can be very “hands on” – like having another full-time job.

Tack on the wacky rules that govern IRAs and the task becomes even more daunting. Let’s consider two of the biggest roadblocks…

WACKY RULE #1: PROHIBITION OF PERSONAL LOAN GUARANTEES
Individuals are precluded from personally guaranteeing loans against IRA assets. What’s the implication? You can’t mortgage property in your own name. Your IRA will need sufficient cash to acquire property. How many of us have a sizeable balance in our IRAs that will allow us to afford a 100% cash purchase of property? What’s more, how many of us want to concentrate our IRAs in a single asset?

WACKY RULE #2: IRA PAYS ALL EXPENSES
Money for expenses such as maintenance and taxes must come from the IRA. What happens if the property requires emergency repair?

Option #1 is panic or swear – maybe both! Not sure what that solves.

Option #2 is contribute money to the IRA to cover the repair and run afoul of the annual limitation on contributions. Doing so buys you a 6% penalty every year these “excess contributions” remain in the IRA.

Option #3 is sell the property which is counter to your goal of owning real estate in your IRA.

Aside from that, how did you like the play Mrs. Lincoln?

Yes, we’re painting a bleak picture. No, we’re not that nihilistic.

Direct ownership of property in an IRA can be a fantastic planning tool if you’ve got the time, expertise, sufficient IRA account size and diversification of your total portfolio. However, it’s important to be mindful of the pitfalls. Caveat emptor!

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We’ll write to you again soon. Keep visiting our site for frequent updates. Keep those comments coming. We love hearing from you.

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