13 Reasons Why NOT to invest an IRA in real property

By Andrea MacDonald, CPA

We often have clients asking us if they can invest their IRA in real estate. It is legal to invest an IRA in real estate, but it is very rarely practical.

Here are 13 reasons why not to invest an IRA in real estate.

#1 – Where do you get a trustee?

I am sure the promoter of the plan has an idea!

#2 – “Flipping” houses in an IRA creates trade or business income inside the IRA.

Trade or business income inside an IRA is subject to a 35% UBIT rate on profits >$1,000.

4 houses on the beach with sand and dunes representing why not to invest an IRA in real estate

#3 – Performing maintenance on the property inside the IRA is a disqualified transaction under IRC Sec. 4975(e)(2)(C).

It then treats the IRA as if it has distributed the entire FMV of the property as a distribution.

#4 – Invest an IRA in real estate? What do you deduct with an annual rental loss?

Answer – you don’t!

#5 – You cannot use it to buy an office building that you are going to use yourself.

This is true even if you pay fair rental value or treat it as a complete withdrawal at FMV and subject to penalty if you are under 59 and 1/2.

#6 – You cannot use it to buy a vacation property if you plan on using it yourself.

This includes at FMV.

#7 – What happens if cash flow is not adequate?

How do you get more money in the IRA without paying the 6% excess contribution penalty or rolling good money into bad?

#8 – An IRA in Real Estate?

How do you take a required minimum distribution from an IRA in real estate?

#9 – If the real estate is leveraged with debt in the IRA and income from the leveraged amount (rental or sale) is taxed to the IRA as unrelated business income at 39.6%.

It requires Form 990-T, and if you owe taxes, it is treated as a taxable distribution when paid!

Apartment building with a car parked outside on the street and palm trees representing why not to invest an IRA in real estate

#10 – If the IRA owes unrelated business income and you pay the tax out of the IRA.

It is treated as an early withdrawal subject to tax and potential penalty.

#11 – Owning real estate outside the IRA will generate capital gains on sale.

While inside the IRA it creates ordinary income. (Just like with stock)

#12 – Real estate sold at a loss outside the IRA is deductible.

But real estate sold at a loss inside the IRA is not deductible.

#13 – Because land is considered an illiquid or non-traditional investment, the trustee must value it every year.

If reading this has created more questions → Email Us!

Andrea MacDonald, CPA is the owner of Pro Tax & Accounting in Chesapeake, Virginia. For nearly two decades, she has been working with businesses on their bookkeeping, accounting, and taxes. She also works with individuals and families on their tax returns. Andrea is a Certified Public Accountant (CPA) and a qualified bookkeeper and tax professional. She is well-versed in tax law, which makes her an invaluable resource for any business.

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Resource: IRS