Real Estate

onecluelessman 2005-12-21 09:36:00 UTC #1

Since a coverdell is considered an IRA I was wondering what the requirements are to buy real estate through them. I believe, and this is part of my question, that you can buy real estate with your IRA. Anyone have any information? Thanks.

Clueless

rsinj 2005-12-21 10:10:00 UTC #2

Considering that the beneficiary is limited to $2000/year (soon to be $3000) in contributions, I seriously doubt it would be possible to amass an amount sufficient to buy or invest in real estate.

I would question someone's intentions for utilizing a Coverdell for "investing" in real estate. I suppose that with any frenzy/bubble some people will attempt to do whatever they can thinking fast/easy money is to be made.

onecluelessman 2005-12-21 10:24:00 UTC #3

"Considering that the beneficiary is limited to $2000/year (soon to be $3000) in contributions, I seriously doubt it would be possible to amass an amount sufficient to buy or invest in real estate."

I'll take that as a complement towards my investment skills, thank you. I have enough to buy some real estate.

"I would question someone's intentions for utilizing a Coverdell for "investing" in real estate."
I think most people just invest in equities because that's what everyone else does. It's never made sense to me that you have to invest in equities for any kind of tax deferred/free savings. Now that someone brought to my attention the fact that you can buy real estate in IRAs I want to look into it.

user_8715 2005-12-21 12:01:00 UTC #4

"soon to be $3000"

Any one know when this would take effect?

drew 2005-12-21 12:14:00 UTC #5

I think the title insurance issues of attempts by the control person to sell real estate held in name of a minor even inside a CESA (if permitted) who retains a right under state law to rescind any such transaction would cause sufficent legal confusion to have most folks steer clear of this one.

Remember you need to liquidate the asset to spend it under CESA rules.

However I would not rule out that one could invest in shares of a partnership akin to some of the games which are permitted with Sec1031 exchanges. Somebody could probably set up CESA pools to invest in real estate market, or gold futures or just about anything. (The pool manager of course might make out quite well)

onecluelessman 2005-12-21 13:43:00 UTC #6

Lets push aside the " Coverdell balances remain low" since not everyone's balances are low. I currently have almost 6 figures in one of my coverdells. And not everyone lives in areas where real estate is way over priced.

Now there are a couple reasons that I want to have RE in this account. But regardless of my reason why, there should be a yes or no on whether or not you can do it.

So, how do you buy real estate with IRAs?

drew 2005-12-21 14:05:00 UTC #7

There are a number of IRA providers what permit the buying of real estate inside them OR a number of providers of 'self directed IRA" for $195 and so forth.

Essentially as this layman sees the rules you set up the provider, go move cash to the provider and the provider buys, manages, sells the RE.

You sort of follow the same route as folks who put RE in IRA's

rsinj 2005-12-21 14:05:00 UTC #8

This page says that you can:
http://www.myrealestateira.com/SelfDirectedIRAFAQs.html

In general, for IRA investment in real estate, you have to find a custodian that will work with you to do it.

Check with the folks at http://www.myrealestateira.com and see what they say. But, before doing it, I would have a CPA review whatever it is you are going to do.

For more info, you can google IRA "real estate" purchase

bwilk 2005-12-21 15:08:00 UTC #9

Clueless,

I don't doubt your balance in your CESA, but could you tell me how you got there? The CESA was only established in 1997. With the $2k per year contribution limit, the maximum basis you could have in the account is $18k. I used the rate function in Excel and assuming that the contributions are made at the beginning of each year and are for the maximum $2k/year, that means you have achieved a 34% annual return every year which would give you just over $100k in the account. Even if you had the account as an EIRA previously, the $500 contribution limit wouldn't change it much. How have you managed a 34% annual return? Did you make a single stock pick and have it turn out great? I'm only asking since the other concern is that more than one person opened a CESA for the beneficiary and each account was funded with $2k per year rather than each beneficiary being limited to $2k per year.

Again, I'm not trying to be a nuisance, but please understand everyone's surprise at a six figure CESA balance.

onecluelessman 2005-12-22 07:46:00 UTC #10

Thanks for the info guys.

As for how I got there, I only have only put $12K into the older account. I made decent money in the first few years by buying options in AMD when it was jumping around. I then started buying options in MSFT. Then in the fall of 04 I bought some options in Google. Google panned out more then EBay did for me (in my regular account) back in the day, MSFT didn't do much and I infact lost some money with it. Most places will not let you trade options with custodial accounts, my current broker has actually taken it away in 2 of my 3 coverdell accounts (I believe it's an error that they haven't taken it away in the 3rd, which is actually the oldest). My philosophy with certain account types (coverdells with > 10 years until college and our Roths until we are 45) is to be extremely aggressive. For instance, if I don't pay for my kids educations, then fine, I had to pay for my own. So now that I have one account that probably has more money then it needs I had a bright idea of buying some land that Chris would eventually get when the account goes over to him. Its really less of an investment and more of a learning and 'forcing' my kid to live close to us .

onecluelessman 2005-12-22 07:59:00 UTC #11

This is basically what I am trying to do:

"Can I buy my dream retirement home with my IRA and then live in it when I reach the age of retirement?

Yes. Your IRA would be the original owner. You would use your IRA money to make the purchase and maintain the property. Any rents generated would be returned to the IRA. However, upon reaching retirement age, the property could be distributed out to you. Of course, you would have to pay taxes at that point but without penalty."

Then of course if I liked everything once I learned what I could by playing with the coverdell, I might want to do it for my retirement property.

eduabc 2005-12-22 22:09:00 UTC #12

Quote form rsinj:

Any one aware when this increase from $2000 to $3,000 is taking effect? Any link? Any Bill in the congress?

(I am aware of a bill in congress that increases CESA contributions to $5,000 and also pre-tax, but is sitting in congress for the past 11 months).

-Raja

rsinj 2005-12-23 02:15:00 UTC #13

"Considering that the beneficiary is limited to $2000/year (soon to be $3000) in contributions"

Sorry - probably my mistake.

Going back, I have no idea where I saw that - and I can't find it.

russellt 2005-12-27 09:11:00 UTC #14

One custodian that will help you with this is www.entrustadmin.com I have a 4 year old that we have done this with and she has done very well with it contrary to what others on this board seem to think. The neutral and negative comments here are from those that do not do it so, give it a try, especially if you are in a low price market. I can understand how people in California do not believe you can buy a rentable house for under 10K but I do it every month. A big part of our market in the south is now selling underpriced property to people out of state that can't believe the prices.

Your goal of doing it with a property you intend to use for retirement may lead to prohibited transactions and self dealing that are not permitted. You should get to know those rules before going forward.

onecluelessman 2005-12-27 09:52:00 UTC #15

Thanks for the info russellt. Around here you can find $20-$30K pieces of property and get $25K grants from the city and county to fix them up. My brother-in-law has a knack for it and somehow gets the grants to pretty much pay for not only the property but some left over to fix it up. Then rents it out for 3 years (there's a 3 year manditory hold if you get a grant) then flips for a nice profit or continues to rent it depending on the house. Now granted he has lots of contacts but he does well. You are absolutely right though, people from the extreme coasts (west and east) can't believe you can get a 2K sq foot house for $500K, let alone $30K. Anyway. Thanks for the info.