Putting IRA in real estate has ramifications, restrictions
Question: MyIRAis more than $1 million. I’m thinking about putting it entirely into real estate. How would this impact my estate plan? I am married and have two adult sons. I’m 51.
Answer: I have several clients who have wanted to put their IRAs in real estate. Depending on the specific investment and your circumstances, there can be upside potential. However, there are several ramifications and restrictions — both during your lifetime and after — that you need to know about before you take the plunge.
■ First, contrary to popular belief, you are going to have to pay ordinary income tax on any appreciation. Longterm capital gains tax does NOT apply to real property in an IRA.
■ If you ever wish to mortgage the property, you would not be able to personally guarantee it.
■ You may not depreciate the property for tax purposes.
■ As with any IRA, you have to have professional management. Any family involvement — for example, a family member residing in the property or guaranteeing a loan — would negate the property’s IRA status and trigger an income-taxable event.
■ You will not be able to take a tax deduction for property tax that you Joseph Karp
The Karp Law Firm, P.A. personally pay. This would be deemed an illegal contribution.
■ At retirement, assuming you do not have other IRA funds, you would need to sell the property in order to start taking required minimum distributions.
■ After your pass away, the step-up in basis, which can save your heirs significant taxes on ordinary real estate investments, will not be available to your IRA.
You should discuss all these issues in depth with your estate planning attorney as well as your investment adviser.
Joseph Karp, a member of the Florida and New York Bars, is a Nationally and Florida Bar Certified Elder Law Attorney and founder of The Karp Law Firm, located in Palm Beach and St. Lucie counties. The firm assists clients with wills, trusts, Medicaid and VA benefits planning, special needs planning, asset preservation, probate/trust administration and estate litigation.