House Flipping Inside an IRA

or Register to post new content in the forum

24 RepliesJump to last post

 

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Nov 18, 2009 10:25 pm

Had a client ask me about rolling their 401k into an IRA and flipping houses inside the IRA.  I tried a search and came up empty but if someone wants to point me to an existing thread, I'd appreciate it.

Anyway, from what I can tell, this idea seems very complicated for the average investor.  Anyone have any thoughts on this and care to share?  Pros and Cons? 

Being limited to the constraints of an IRA seems like the biggest issue.  Not being able to contribute more that 5K annually or take any profits out prior to age 59.5 seems like anther issue.  

Also, does anyone know a custodian willing to do this?

Thanks fellas (and ladies)

Nov 18, 2009 11:44 pm

We had someone want to do this about a year ago.

- It must be setup in a Self Difected IRA, there are special places to custodian one of these
- Neither the IRA owner or anyone of linear descent is allowed to occupy the property
- The IRA Owner may not labor on the property themselves, their family may not labor on it.  They can only pay market rate to others to do work on the property
- The IRA Owner may not personally guarantee a mortgage that is made inside the IRA.  Essentially what this means is that the IRA must qualify for the mortgage based off the assets in the account.  Banks aren't exactly lining up to make loans without a personal guarantee
- There is no tax deduction allowed for depreciation, property taxes, interest expense, etc.



It's basically the dumbest idea ever created.  It would be like putting muni bonds inside an IRA.  The things that make real estate attractive, namely the tax advantages, and the ability to use cheap leverage are negated inside an IRA.

If you're still not convinced it's a bad idea do a search on the tax consequences of a prohibited transaction.

Nov 19, 2009 7:15 am

Broker (talking to his 70 1/2 year old client):  "You need to take your RMD this year."


Client: "How much will that be?"
 
Broker: "$8,000"
 
Client: "Ok.  The upstairs 2nd bathroom is worth $8000.  I'll sell the bathroom."
 
Sounds like a good idea to me.
Nov 19, 2009 9:11 am

Great points guys, thank you.  Keep them coming.  Can you believe that the client's registered CPA gave them this brilliant idea???

I can see how this is even close to a viable retirement strategy.

Nov 19, 2009 9:33 am

The CPA probably heard about it on the radio and figured he was doing his handyman client a favor.  I've had a small handful of people ask me about this over the years.  None of them, after figuring out what the headaches are, have made the jump. 


House flipping is tough enough, without the extra burdens of not being able to do much of the work yourself.  That's where most people make money on these things. 
 
Oh yeah, if you haven't noticed, CPAs are not typically the sharpest knives in the drawer.  Just like a lot of engineers they're book smart, but common sense dumb. 
Nov 19, 2009 12:15 pm

He's coming back BIG TIME.

 
Nov 19, 2009 1:05 pm

I meant to say... I CAN"T believe this is even close to a viable retirement strategy.  I see a mountain of Cons associated with this idea.  Someone play Devil's Advocate and tell me any reason this is a good idea.  This client seems pretty convinced but I haven't spoken to her in depth yet to see what her thought process is and how she thinks this could benefit her.

Nov 19, 2009 1:08 pm

There is a really good thread already about this - where some real estate guy was arguing for it (although I believe he ended up seeing the light).

Nov 19, 2009 1:16 pm
Wet_Blanket:

There is a really good thread already about this - where some real estate guy was arguing for it (although I believe he ended up seeing the light).



I figured there was already a thread about this.  I admit... I am a forum search retard.  I can never find what I am looking for. if you could point out the thread, I'd appreciate it.

On a related note:  While researching this, I stumbled into real estate options.  Could this be an easier alternative to suggest for this client?

Nov 19, 2009 1:30 pm

explain

Nov 19, 2009 1:36 pm

http://forums.registeredrep.com/forumposts.asp?TID=8646


That will be $29.95.
Nov 19, 2009 1:58 pm

In theory it can be done.  But you must be careful with RMDs and such.  Equity Trust is the largest custodian for these types of investments.

Nov 20, 2009 12:39 am
Wet_Blanket:

http://forums.registeredrep.com/forumposts.asp?TID=8646


That will be $29.95.



Great thread!  Thank you.

Nov 20, 2009 4:01 pm

It's expensive to do as the custodian of the IRA will need an appraisal to be done each and every year.... Major problem.

Nov 20, 2009 4:07 pm
captclose:
Wet_Blanket:

http://forums.registeredrep.com/forumposts.asp?TID=8646


That will be $29.95.



Great thread!  Thank you.

 
Nov 20, 2009 7:43 pm
captclose:

Great points guys, thank you.  Keep them coming.  Can you believe that the client's registered CPA gave them this brilliant idea???

I can see how this is even close to a viable retirement strategy.

 
That CPA just committed malpractice...and you can tell your client that came from another CPA (and CFP for good measure) with almost 20 years in the investing industry.
 
What a stupid, stupid, stupid idea.
Nov 20, 2009 8:11 pm
Indyone:
captclose:

Great points guys, thank you.  Keep them coming.  Can you believe that the client's registered CPA gave them this brilliant idea???

I can see how this is even close to a viable retirement strategy.

 
That CPA just committed malpractice...and you can tell your client that came from another CPA (and CFP for good measure) with almost 20 years in the investing industry.
 
What a stupid, stupid, stupid idea.


 
 
Been a while, nice to see you back.
Nov 20, 2009 8:15 pm

Same to you.  I've been busy with the new office.  I think I lost five pounds last week just because I was too busy getting everything ready and moving and hardly stopped to eat.  New office is great and open house is scheduled for Black Friday.

Nov 21, 2009 11:40 pm

 You see that building? I bought that building in my IRA ten years ago. My first real estate deal. Sold it two years later, made an $800,000 profit. It was better than sex. At the time I thought that was all the money in the world. Now it's a day's pay.

Dec 11, 2009 10:36 pm
BerkshireBull:

We had someone want to do this about a year ago.

- It must be setup in a Self Difected IRA, there are special places to custodian one of these
- Neither the IRA owner or anyone of linear descent is allowed to occupy the property
- The IRA Owner may not labor on the property themselves, their family may not labor on it.  They can only pay market rate to others to do work on the property
- The IRA Owner may not personally guarantee a mortgage that is made inside the IRA.  Essentially what this means is that the IRA must qualify for the mortgage based off the assets in the account.  Banks aren't exactly lining up to make loans without a personal guarantee
- There is no tax deduction allowed for depreciation, property taxes, interest expense, etc.



It's basically the dumbest idea ever created.  It would be like putting muni bonds inside an IRA.  The things that make real estate attractive, namely the tax advantages, and the ability to use cheap leverage are negated inside an IRA.

If you're still not convinced it's a bad idea do a search on the tax consequences of a prohibited transaction.

 
Met with a client today who started to say she wanted to pull 200K from her IRA to buy a home in Vegas inside an IRA.  I remembered BerkshireBull had a great post for this a month ago and I quick ROOGLED it with the client sitting at my desk.  She is thinking twice about that decision.  Great Post Berkshire, that is what this forum is about!