 Pitfalls
of using IRA to buy real estate
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 Dear
Tax Talk,
My husband and I have several traditional IRAs. We heard that you
can put them all together and create one account that can in turn
buy a property in some kind of trust. I heard the term self-directed
IRA. How can we do this?
-- Marietta
 Dear
Marietta,
While in theory it's true that you can invest in real estate using
IRA funds, in practice it becomes difficult. If you want to use
the money in your IRA to buy real estate, you'll have to find an
IRA custodian that will allow this type of investment. Your bank
and your broker won't, since they want you to invest in their products.
It's also a more complex administration. The custodian fees in a
self-directed IRA will be considerably higher than those that the
bank or broker charge, especially for real estate. For example,
the custodian will charge for handling transactions such as taking
rent deposits and paying bills at anywhere from $5 to $25 per item.
In addition, you usually cannot have financed property
in an IRA. This means you have to have enough funds in the IRA to
go out and pay cash for the property. If you set up the IRA yourself,
the account may only have enough funds to buy land. If you want
to develop that land, you'll have to wait long enough to contribute
more cash (due to the $4,000 annual limits) to pay for the construction,
since you cannot finance.
Aside from losing leverage from financing, you're also converting
long-term capital gains into ordinary income. If you hold property
outside your IRA for more than one year, the maximum long-term capital
gains tax rate is 15 percent. The maximum tax rate that applies
to IRA withdrawals can easily be more than double the capital gains
tax rate.
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