Copyright 
Dow Jones & Company Inc Jul 23, 2003Among some creative ways to do so -- and pay no tax on the gains accumulated from the property: Convert a traditional IRA into a Roth IRA and use the plan to acquire real estate; or start a separate Roth IRA and then buy a partial interest in property through entities known as tenant-in-common programs. (See Chart for more information.)
These and other suggestions come from a new book, "IRA Wealth: Revolutionary IRA Strategies for Real Estate Investment," written by Patrick W. Rice, owner of IRA Resource Associates Inc., a Camas, Wash.-based advisory firm specializing in real-estate investing for self-directed retirement accounts.
When switching to a Roth, Mr. Rice advises converting a portion of the holdings each year. "A lot of people don't know that if they're sitting with $300,000 or $400,000 in a traditional IRA, they don't have to convert the whole thing," he says. "They can convert a portion of it every year, depending on how much they can afford in taxes."
In general, an individual with an IRA account who wants to invest in real estate must first conduct a transfer from his or her account with a stock broker, banker or insurance company to an independent custodian that offers real estate as an investment option. These include Lincoln Trust, of Denver, Colo., Pensco Inc., San Francisco, and Sterling Trust Co., Waco, Texas.
Once the individual finds a property to acquire, he or she signs a direction letter, a form that instructs the custodian to buy the property. The custodian writes a check drawn from the account to a third-party escrow company and the title goes in the name of the IRA and the custodian.
Rents go into the IRA, and any expenses come out of the IRA. In a Roth plan, gains will be tax-free because there are no taxes on contributions. In a traditional IRA, profits generated from the property go back into the IRA and are taxed as contributions.
Still, there are some caveats to consider before rushing to convert accounts. Conversion, if you qualify, is simple, but can be costly. Investors must pay taxes due on their old IRA at the time of conversion. And not everyone qualifies for conversion. If your adjusted gross income totals more than $100,000, you don't qualify.
Gary C. Pokrant, a certified public accountant and tax principal with Reznick Fedder & Silverman CPAs P.C. in Bethesda, Md., points out that if you don't have enough funds to pay taxes on a conversion and are under the age of 59 1/2 -- when Roth withdrawals become tax- and penalty-free -- IRS penalties will more than wipe out any tax savings. He adds that "if you will be in the same or lower tax bracket in retirement, then a conversion may actually leave you with less after all taxes are considered."
What's more, everything isn't tax-free in a Roth. There's a little- known levy on portions of the property's income or on gains from the property's sale. This levy, the unrelated business income tax, typically applies to properties purchased with mortgages in an IRA.
---
See the most recent Building Value Q&A column online at RealEstateJournal.com. If you have a real-estate question,e-mail it to BuildingValue@wsj.com.
My Research
