TAX-FREE TRANSFER OF YOUR IRA FROM STOCKS TO INVESTMENTS IN BLACK HILLS REAL ESTATE

Most people assume that an IRA is synonymous with stocks and mutual funds. Not true. When Congress set up the IRA tax deferral concept, they deliberately left it wide open for us to invest our IRA's in many kinds of assets other than stocks. But most stock brokers sure don't tell you about this.

In fact, when Congress established the IRA tax-avoidance/deferral program, Internal Revenue Code 4975, they said we could invest in any type of asset, except for five very specific things:

1. Collectibles such as art, antiques, jewelry


2. Life insurance


3. Coins


4. "Party-in-interest" transactions


5. Most sub-chapter 'S' stock.
   

So that means Congress intended we could invest our IRA's in just about anything else, such as French gas stations, American fast food resturaunts, or...Black Hills real estate. (Full disclosure: I have transferred much of my lifelong retirement savings out of gambling in the stock market, over to investing in Western-U.S. real estate. And done very well, thank you.)

As it turns out, real estate is one of the easiest forms of asset to invest in with your IRA. And buying real estate with my IRA was no more complicated than buying my last home.

However, keep in mind that the IRS is real persnickity about not violating a few specific "prohibited transactions", which they enumerate very clearly in IRS Publication 590, Individual Retirement Arrangements. The IRS penalties for violating one of these prohibited transactions can be severe. But it is not difficult to steer clear of problems if you don't play games against the IRS.

It has helped me to think of it this way (I hope this is right). The IRS seems to treat my IRA account as the domain of virtually another person, separate from me. The IRS knows that my "Lee's IRA" does not pay taxes. So the IRS gets real interested if this guy "Lee's IRA" starts slipping assets to the real Lee. Reason is, the real Lee is not tax exempt. And if a tax exampt entity has avoided paying taxes, then if that entity (my IRA) starts shuttling money or beneficial use of assets to me, then the IRS regards it as a "taxable distribution.

In fact, that is why it is important to invest in things that will not transfer virtual benefits directly to you. For example, if your IRA invests in a campground, don't go camping there without paying. Or if you invest in a gas station, don't get caught with the gas station giving you gas. Otherwise, it a taxable event, to transfer assets from your non-taxed IRA to your taxable self.

However, it's not that difficult to avoid these violations. In my case, I pay a small fee to my bank's trust department (Great Western Bank in Rapid City) to help me manage my self-directed real estate IRA account. I make all the decisions, to buy or sell or select or enhance a real estate holding. But I run it by the trust officer ("custodian" in IRS parlance) first, so that he can make sure I'm not violating an IRS rule. This has been a simple and convenient relationship. In fact, for the fee involved, I have greatly appreciated having a partner on my side to talk over investment ideas.

If you are contemplating a switch from gambling in the unruly stock market, and moving in to investments in Black Hills real estate, you are welcome to call me to chat. But keep in mind, you really need to consult with professional tax advice and engage the services of a custodian for your account. You could also consult with one of the self directed/real estate IRA services companies such as Pensco Trust Company. You may also be interested in the IRA Association of America.

Now, just for fun, let's start considering the matter of leveraged investments within your IRA. That is, borrowing part of the purchase price of an investment in a real estate oriented business, such as strip malls. That gets much more interesting, due to the IRS' prohibition agains the IRA using collateral from outside itself, or relying on your personal income for securing the loan. That's where "non-recourse loans" come in. In a non-recourse loan, the lender has no recourse to go outside the IRA to recover bad debts (to your IRA). In fact, when I talked with Roger St. Pierre of First Western Federal Savings Bank here in Rapid City, he had surprisingly minimal interest in my personal credit record or FICO score, because if my IRA were to default on the non-recourse loan, the bank would not have recourse to my personal assets.