Sorry it took so long to answer, but I was out of town last week doing my family holiday visits.
Up until the new Roth IRA came into effect, IRA contributions were limited to the smaller of $2000 or W-2 income. For the past several years, I have not had any W2 income, so I never opened an IRA.
Since I am very well tax sheltered, I have not paid any income taxes for the past few years. Therefore, I could not see any advantage to investing from a Roth IRA either.
Therefore, I have not used an IRA to fund my investments.
Have you done any purchases using your IRA Roth or Conventional to do a purchase. I am pretty interested in using my Roth to do a purchase but it has little funds in it since the market went south.
I am concentrating most of my efforts into the ROTH.
I know that you are a rental property investor, and that you know there is no real immediate tax advantage to purchasing your long term rental property within your IRA.
Therefore, I am assuming that you are considering funding flip transactions from your IRA. Since your IRA funds are low, consider using options to acquire your flip property. Hopefully, a low price for the option itself will permit the transaction to be competely funded from within the ROTH IRA, and the entire gain from the sale is retained by the IRA, is tax-free, and is free to grow tax-free.
If on the other hand, you have to "lend" your IRA funds to complete a purchase, then Unrelated Business Income (UBI) issues come into play. Even if you contribute your own funds out of pocket to the deal, it may still be considered that your IRA borrowed a portion of the funds to do the deal. It is my understanding that the profit portion attributed to the borrowed funds would be subject to UBI taxes (UBIT).
Most of the time, the IRS views flip property as "dealer" realty and your flip activity is a business. Running a business in an IRA may subject you to UBIT.
Another general rule provides that UBIT is only imposed on income from a trade or business (including activities carried on through a partnership) if the business is frequent, continuous, and pursued in a manner similar to commercial businesses. This is known as the "regularly carried on test."
In addition, specific exclusions from UBIT are provided for certain types of income primarily involving passive income sources and includes rents from real property and capital gains. Passive income (except dividends) may still be subject to UBIT if the income is received from debt-financed property.
One approach to dealing with UBIT in an IRA with real estate is to use a buying entity such as a Corporation or LLC. Have the IRA buy shares in the ownership corporation or units in the LLC (established as a limited partnership). The IRA investor becomes the passive shareholder, or limited partner, and gives up any claim to deductions and depreciation, as well as giving up a claim on rents. When the property is sold, the corporation (general partner) distributes an equitable share of the profits to the IRA and redeems the IRA's shares/units.
UBIT is a very complex issue. Anyone planning to use IRA funds to buy real estate should consult the IRA custodian company. The custodian company deals with this issue all the time and is in a much better position to advise you and your tax preparer on how to conduct your "business" to minimize your tax liability.
[ Edited by DaveT on Date 12/16/2002 ]
Joel,
Sorry it took so long to answer, but I was out of town last week doing my family holiday visits.
Up until the new Roth IRA came into effect, IRA contributions were limited to the smaller of $2000 or W-2 income. For the past several years, I have not had any W2 income, so I never opened an IRA.
Since I am very well tax sheltered, I have not paid any income taxes for the past few years. Therefore, I could not see any advantage to investing from a Roth IRA either.
Therefore, I have not used an IRA to fund my investments.
Dave[ Edited by DaveT on Date 12/16/2002 ]
No,
Have you done any purchases using your IRA Roth or Conventional to do a purchase. I am pretty interested in using my Roth to do a purchase but it has little funds in it since the market went south.
I am concentrating most of my efforts into the ROTH.
PS. 2003, the contributions go up to $3000.
I know that you are a rental property investor, and that you know there is no real immediate tax advantage to purchasing your long term rental property within your IRA.
Therefore, I am assuming that you are considering funding flip transactions from your IRA. Since your IRA funds are low, consider using options to acquire your flip property. Hopefully, a low price for the option itself will permit the transaction to be competely funded from within the ROTH IRA, and the entire gain from the sale is retained by the IRA, is tax-free, and is free to grow tax-free.
If on the other hand, you have to "lend" your IRA funds to complete a purchase, then Unrelated Business Income (UBI) issues come into play. Even if you contribute your own funds out of pocket to the deal, it may still be considered that your IRA borrowed a portion of the funds to do the deal. It is my understanding that the profit portion attributed to the borrowed funds would be subject to UBI taxes (UBIT).
Most of the time, the IRS views flip property as "dealer" realty and your flip activity is a business. Running a business in an IRA may subject you to UBIT.
Another general rule provides that UBIT is only imposed on income from a trade or business (including activities carried on through a partnership) if the business is frequent, continuous, and pursued in a manner similar to commercial businesses. This is known as the "regularly carried on test."
In addition, specific exclusions from UBIT are provided for certain types of income primarily involving passive income sources and includes rents from real property and capital gains. Passive income (except dividends) may still be subject to UBIT if the income is received from debt-financed property.
One approach to dealing with UBIT in an IRA with real estate is to use a buying entity such as a Corporation or LLC. Have the IRA buy shares in the ownership corporation or units in the LLC (established as a limited partnership). The IRA investor becomes the passive shareholder, or limited partner, and gives up any claim to deductions and depreciation, as well as giving up a claim on rents. When the property is sold, the corporation (general partner) distributes an equitable share of the profits to the IRA and redeems the IRA's shares/units.
UBIT is a very complex issue. Anyone planning to use IRA funds to buy real estate should consult the IRA custodian company. The custodian company deals with this issue all the time and is in a much better position to advise you and your tax preparer on how to conduct your "business" to minimize your tax liability.
[ Edited by DaveT on Date 12/16/2002 ]