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Hello - I'm looking into setting up a self-directed IRA for the purpose of owning a rental property. It seems pretty complicated and I'm still doing the research, but the company I would work with is Guidant Financial Group.
It seems that most people believe you can use an IRA to buy stocks and bonds only. But apparently one can own real estate and even a business if it is set it up correctly and I don't violate the many, many rules that are put in place by the IRS.
So please, if any of you have ACTUAL EXPERIENCE with either a self-directed IRA or Guidant, please let me know the good and the bad that you've encountered. Thanks
not anything i would ever do ..... found a nice list on the internet of reasons
You can NOT use leverage, i.e. no mortgage.
You can NOT use the property in any way - neither you, your spouse, kids nor grandkids can use the home. It must be rented out to others and used for investment purposes. Use it ONE day and it is deemed a full distribution subject to ordinary income tax and a 10% penalty if under 59½.
you cant take the depreciation allowance
You lose the ability to do a tax free exchange called a 1031.
You lose the 15% capital gain rate
You can NOT make any additions to the IRA beyond your $5K/year. What if the property needs major repairs,renovations or has no tenant .
If you mess up in any way with a "self-directed IRA", the entire IRA is deemed to be distributed. That means ordinary income tax and a 10% penalty if you make a mistake.
And last but not least, you have to take RMDs (Required Minimum Distributions) upon reaching 70½.
quite frankly you have to be crazy to do it in my opinion.
Last edited by mathjak107; 08-17-2011 at 01:12 PM..
The Guidant Financial product is actually quite good. I wish I had seen this post earlier, but here is some feedback regardless.....
- If you have a Roth IRA, you don't need to worry about tax free exchanges, capital gains tax rates, etc.
- If you earn money on your investments, then you can exceed the $5,000 per year increase in your available funds.
- You can invest in Private Mortgage loans which are becoming VERY popular due to the issues related to getting a loan from a commercial financial institution.
There are lots of good things about the Self Directed IRA, especially using Roth funds. Don't rely on any one person's input. Do your research....there is lots of info online.
I don't know about Guidant Financial, but self-directed IRAs as a whole are targeted by fraudulent promoters who often misrepresent the custodian's responsibilities. There is a general SEC alert at sec.gov/investor/alerts/sdira.pdf. Even if the IRA is not victimized by fraud, there are issues when legitimate nontraditional assets are placed in an IRA. Tax benefits and liquidity being the leading issue.
As already pointed out, you lose depreciation on a real estate if rented. Also
1. Income on the sale of the property will be taxed at ordinary income levels as compared to a capital gains rate.
2. There is no step-up in basis on property in an IRA when the owner dies.
3. Liquidity issues if the owner reaches 70 1/2. Must have funds available to take required distributions. This means you must have an annual valuation to determine FMV every year. This is an expense of the IRA.
4. Maintenance, taxes and other expenses also expense of IRA. Again liquidity issues.
As a general rule, tax benefits are better when real estate is held outside of an IRA.
The Guidant Financial product is actually quite good. I wish I had seen this post earlier, but here is some feedback regardless.....
- If you have a Roth IRA, you don't need to worry about tax free exchanges, capital gains tax rates, etc.
- If you earn money on your investments, then you can exceed the $5,000 per year increase in your available funds.
- You can invest in Private Mortgage loans which are becoming VERY popular due to the issues related to getting a loan from a commercial financial institution.
There are lots of good things about the Self Directed IRA, especially using Roth funds. Don't rely on any one person's input. Do your research....there is lots of info online.
Cheers,
Bill
i believe you have to do some crazy things to get a loan into the roth structure , and i think for most people converting from their traditional iras to a roth and being taxed will leave them with alot less money then they need to pull this off. those conversions to get enough dough may trip the amt tax for many really walloping them
i would think your heirs would have one heck of a hassle inheriting real estate in a roth and taking the required distributions over their lifetime . im not even sure how it would work with real estate thats not liquid.
its far easier to just pass it on outside the roth at a stepped up basis and call it a day.
not to mention no depreciation.
sorry but im not convinced this really is the way to go.
Last edited by mathjak107; 01-17-2012 at 05:28 PM..
googling around it looks like if you inherit the roth real estate you have to take the entire distribution by December 31st of the fifth year following the year of the IRA owner’s death.
so at that point the heirs lose the shelter of the roth. . that kind of takes away the wealth passing aspect of having a roth because if its liquid assets as an heir you could elect to take a life time distribution keeping things growing tax free over your lifetime based on the IRS charts. if you get a large enough return you may actually have more than you started with even after following the irs table. .
thats a powerful force you lose with real estate because you cant sell off a room each year to meet the distribution requirements ,you can only take the real estate in one shot yanking it out of the roth..
thats reason enough i wouldnt do it but thats just me.
what if the heirs need money to keep the house going because the roth hasnt been in place for 5 years yet when they inherit it?, where is that coming from,it cant be personal funds.
am i missing something here? it just seems like to many rules, to many chances for slip up , to many obstacles and the loss of key reasons to own real estate namely depreciation and passing to heirs at a stepped up basis.
Last edited by mathjak107; 01-18-2012 at 03:59 AM..
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Misleading info
