FEDweek

Real Problem

Now that stocks have lost value, you might be thinking of investing your IRA in real estate. If you buy a rental house for all cash within your IRA, for example, the purchase probably won’t violate IRS rules.

A problem may arise, though, when you pass age 70 1/2 and have to take minimum distributions from your IRA. You might have to pay an appraiser to put a value on the property each year. If you value it yourself, the IRS might say that your value was too low and hit you with a 50 percent penalty on an insufficient distribution.

Another option is to distribute a partial interest in the real estate each year. If the IRS table shows your required distribution for a given year is 1/22 of your IRA, you’d distribute a 1/22 interest in the property and pay tax on the estimated value. Not only is this technique complicated, the IRS might charge you with underpaying income tax and violating rules against entering into transactions with your own IRA.

If you do own real estate in your IRA, the best strategy is probably to sell the property before age 70 1/2. Then you’ll have cash to meet the minimum required distribution rules.