Dumb to put rentals in Roth IRA? - Posted by Ron (MD)

Posted by jimi on March 12, 2002 at 05:50:55:

Not yet! The reduced tax rates are being phased in(drat!Feds understand time value of money). I believe that the phase in is over a four year period beginning w/ 2001.

Dumb to put rentals in Roth IRA? - Posted by Ron (MD)

Posted by Ron (MD) on March 11, 2002 at 14:41:58:

I’m considering putting rentals in my 401k. They would be low-end, high cash flow deals (e.g, $20k total invested for $700-$800 per month rent).

I’m struggling with the fact that I would not benefit from the depreciation write-off, since the Roth income is tax-free anyway.

I’m thinking that the depreciation write-off is really just a deferment of the related tax (until I sell the property in 5-10 years and have to recapture the depreciation), so it’s just not that big a deal to lose it.

Any thoughts?


Ron Guy

Here’s an Idea to think about - Posted by Frank Chin

Posted by Frank Chin on March 12, 2002 at 05:53:48:

Hi Ron:

I recall studying RE partnerships some years back that different financial elements can be allocated differently than one’s financial interest. I recall the elements mentioned was:

1- Down Payment
2- Appreciation
3- Depreciation
4- Profit and Loss

If there was no written agreemnt, then if partner A and partner B each contributed 50% downpayment, then it is understood that they will share equally in all the other elements, i.e. appreciation, depreciation, P&L.

If an “arms length” and “written partnership agreement” can be made amongst the partners, then the allocations can be made differently. I recall the rule is that each partner must take at least 1% of an element, so if one decides not to take depreciation lets say, you’ll be allowed 1%, and the other partner allowed 99%.

For instance, if I was partner A, and partner B was RonGuy IRA, then a parntership agreement can be constructed where the IRA is allowed 1% of the depreciation, but in return allowed a higher proportion of something else, lets say the P&L.

I recall the example given for such an arrangement was that one partner for whatever reason cannot or does not want depreciation, so it will elect to take a higher proportion of another element, such as 99% of the apprecaition when the property is sold. Other combination can be made.

I don’t know all the peculiarities of laws pertaining to IRA’s, but I see no reason why Ron Guy cannot go into partnership with “Ron Guy IRA” lets say. And if Ron Guy IRA cannot borrow lets say, then Ron Guy can do the borrowing in.

I also see the benefit of the non IRA partner taking ALL (99%) of the depreciation for only a 50% contribution.

I beleive in the area you operate in, appreciation is low, but cash flow is relatively high, so losing some depreciation may not be a big loss. Also weigh recapture when you sell. I believe you’ll have to pay recapture even if you don’t take the allowed depreciation.

There’s another issue. If it’s set up as a LP, then the IRA partner’s liability will be limited to it s investment in the partnership, rather than everything in the IRA.

Frank Chin

Re: Dumb to put rentals in Roth IRA? - Posted by Wayne (MD)

Posted by Wayne (MD) on March 11, 2002 at 21:38:46:

Ron – Why would you bother to put a rental into the IRA when you can avoid so many problems by simply funding your re-habs within the IRA? You obviously are remarkably successful with them and they turn a terrific profit for you. I would fund as many of those in the Roth as you can get away with to build the equity. When and if that slows down, then I would go after rentals, which also seem to be quite lucrative for you. The advantage of the former is that you have no tenant problem with which to deal.

Wayne Carpenter

Here is an interesting Question - Posted by Tim Jensen

Posted by Tim Jensen on March 11, 2002 at 20:21:05:


Ponder this.

Lets say that something happens at the rental (lead paint or mold) that is not covered by insurance. Would that give the injured party the oportunity to raid the entire IRA? That would be a big concern of mine.

What do you think?


Re: Dumb to put rentals in Roth IRA? - Posted by Nate(DC)

Posted by Nate(DC) on March 11, 2002 at 17:40:08:


Then again, the other side of the coin is that if you’re spending only $20K or so on a property, your depreciation deduction is almost too small to care about. So why NOT put it in the IRA.

If you bought a property for $20K, let’s say $5000 of that is the land (which doesn’t depreciate) and $15K is the building. So your depreciation deduction would be $545 per year, which if you’re in the 39% tax bracket is a whopping $213 annual savings. And that’s if your depreciation deduction doesn’t get wiped out by the AMT or some other threshold.

I say, go for the IRA!


Re: Dumb to put rentals in Roth IRA? - Posted by Dan

Posted by Dan on March 11, 2002 at 16:07:27:


The way i have done it is set up a LLC to own the rentals. Then sell the LLC to the ira. The LLC operator must be of arms lenght transaction.

It is best to talk to Hugh Bromma from entrust. He is super slick and can tell yo how you need to go about it.

Dan Fink

You can put some in my 401K… - Posted by JT-IN

Posted by JT-IN on March 11, 2002 at 16:06:47:


The numbers that you are talking about represent a 35 to 50% cash on cash return, with little risk. Other alternatives for investment choices hold significantly more risk of capital, (remember Enron"), and may return considerably less in overall rate of return.

Where do you find a better choice for your funds…? The only question is, are you comfortable with the investment mgr…? LOL Case closed.

I realize that I am speaking to the congregation, about those who are not in church, here. Seems like you have a good answer to the problem.

Just the way that I view things…


Re: Dumb to put rentals in Roth IRA? - Posted by Aaron

Posted by Aaron on March 11, 2002 at 14:59:53:

Remember that IRAs and 401Ks cannot incur debt. Unless you were to completely pay for a property under your retirement plan, the only way to do it would be a sub2.

Re: Dumb to put rentals in Roth IRA? - Posted by Ron (MD)

Posted by Ron (MD) on March 11, 2002 at 21:50:57:


First, I wouldn’t say that I’m “remarkably successful” with rehabs. I feel more like the slow and steady tortoise that lumbers along, moving toward the goal line.

Anyway, I am doing rehabs in the IRA, but I have excess capital in the IRA and the rentals seem like a good way to utilize it.

By the way, you asked below about unfinished cabinets. Another place to try is Just Cabinets on Ritchie Highway, just inside the beltway. I noticed today that they have a limited selection.

Ron Guy

Re: Here is an interesting Question - Posted by Ron (MD)

Posted by Ron (MD) on March 11, 2002 at 21:41:19:


I asked that very question of Hugh Bromma of Entrust. He said that a lawsuit related to any one property within an IRA can only attach that one asset, not the balance of the IRA.

Good question, though.

Ron Guy

Good points, Nate - Posted by Ron (MD)

Posted by Ron (MD) on March 11, 2002 at 21:37:59:

You’re right. It is a minor consideration. I hadn’t taken it to that nuts-and-bolts level to intelligently analyze it.


Are you going to the convention? I’d like to meet you…since your a “neighbor”.

Ron Guy

Re: Dumb to put rentals in Roth IRA? - Posted by David Krulac

Posted by David Krulac on March 11, 2002 at 17:52:57:


If you’re in the 39.6% tax brackett aren’t you also INeligible for the Roth IRA?

David Krulac

Re: Dumb to put rentals in Roth IRA? - Posted by Ron (MD)

Posted by Ron (MD) on March 11, 2002 at 21:35:57:


I spoke with Hugh (my IRA is with Entrust).

He makes the LLC w/i the IRA sound like a pretty complicated way to go…specifically, he said I have to get it set up through an attorney.

I don’t see the benefit of it, aside from being able to handle all the transactions myself within the LLC rather than having to go through Entrust.

Asset protection doesn’t seem to be a big factor, 'cause Hugh says any lawsuit related to a particular property can only go after that particular property within the IRA, not the balance of the account.

I still haven’t thought through the daily financial management of the rentals, though. It seems like every rent check must be payable to Entrust and mailed to them. Every disbursement (e.g., utility bills, minor repair bills, etc.) must come from Entrust. It seems very cumbersome.

Am I missing something here?

Ron Guy

Good points, but … - Posted by Ron (MD)

Posted by Ron (MD) on March 11, 2002 at 21:29:52:

…I’ve seen my “investment manager” do some pretty stupid things.

Nevertheless, I think you’re right.


Ron Guy

Re: Dumb to put rentals in Roth IRA? - Posted by Ron (MD)

Posted by Ron (MD) on March 11, 2002 at 21:27:30:

Actually, you can borrow within a Roth IRA. The catches are the loan must be non-recourse and the profits related to the borrowed amount are taxable.

Ron Guy

Thanks for the Cabinet Tip (NT) - Posted by Wayne (MD)

Posted by Wayne (MD) on March 12, 2002 at 03:47:51:


Re: Here is an interesting Question - Posted by Ben

Posted by Ben on March 12, 2002 at 06:38:58:

You are not actually owning in the IRA, are you?

Re: Good points, Nate - Posted by Nate(DC)

Posted by Nate(DC) on March 11, 2002 at 21:46:52:

Unfortunately, no, not gonna make it this year. The timing is all wrong with both work and personal stuff being at a very busy point over the next few weeks.

Maybe we should get together for coffee sometime anyway…you could come to DC and check out my rehab, or I could come to Baltimore and see some of yours…


Re: Dumb to put rentals in Roth IRA? - Posted by Ron (MD)

Posted by Ron (MD) on March 11, 2002 at 21:39:39:


Nate was using the 39.6% as a worst-case scenario.

Nevertheless, it is possible to have an IRA now irrespective of you income if it was established when you income was low enough to qualify.

Ron Guy