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LawTalk, Attorney
Category: Legal
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Experience:  I am a practicing attorney with more than 3 decades of experience in the legal field.
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I am requesting legal advice on how to purchase property

Customer Question

I am requesting legal advice on how to purchase property using my IRA without getting gouged by the IRS.
I saw an ad on tv where it is possible, as long as I don't touch the money and all proceeds from the rent/lease go back into the IRA.
Submitted: 2 years ago.
Category: Legal
Expert:  LawTalk replied 2 years ago.

Good afternoon,

I'm Doug, and I'm sorry to hear of the confusion. My goal is to provide you with excellent service today.

While your IRA or 401K can own real property, you, as the owner of the retirement vehicle are prohibited from the day to day operation of your rental. You may not prepare leases for the property, enter into lease contracts on behalf of your property, you may not personally collect rent or perform any maintenance on the property. You can't even go in and repaint it yourself in between tenants.

If your IRA broker is not doing this for you, you must actually hire a trustee to do all of these things for you---and they must be paid out of the IRA. You must locate an independent trustee that offers such a service (for example, to hold title to the real estate, to collect rent, have the maintenance done). Additionally, you cannot put a single penny of your own money or time into the care and maintenance of this property.

Your failure to abide by all of these rules will mean that the IRS will disallow the investment, force it to be removed from the IRA, and treat all the money used to acquire the property, and maintain the property, including taxes and insurance as an advance to you from your IRA. You will have to immediately pay the early withdrawal penalty and then pay taxes on the income dating back to when you first used your IRA funds to purchase the property.

You cannot do any of the legwork in renting the property. You cannot even hire your usual agent to rent it for you. The trustee must do all of this legwork for the IRA. You must stay completely out of it. The only communication you should have is with the trustee about the status of the property in the IRA.

You can ask your IRA Administrator about having the IRA hire a trustee to assist with finding and buying a property for you and then the trustee will manage the property for you.

You may reply back to me using the Reply link and I will be happy to continue to assist you until I am able to address your concerns, to your satisfaction.

Please remember to rate my service to you so that I can be compensated for helping you. Thank you in advance.

I wish you and yours the best in 2015,