QUESTION:
I came across your web site and blog which has a few questions and answers similar to my situation but I couldn’t quite find an answer, I wonder if you can help me.
My two brothers and I own a small investment property with equal ownership 1/3 each, directly in each of our names i.e. taxable, no IRA’s. The mortgage is down to about $130k and we are considering just paying off the mortgage and owning the property outright, we’d each pay 1/3 of the remaining mortgage balance. We manage the property ourselves, never have any personal use, and split all income and expenses 3 ways.
I would prefer to own this in an IRA if possible. I know that selling real estate from myself to my IRA would be a prohibited transaction, but I wonder if that applies if I am just a 1/3 owner. I wonder if we can sell the property such that the new owner is 1/3 each of my two brothers and 1/3 my IRA. I am not sure if they’d be interested in owning the property in their iRA or 401k, if not, then the new ownership may be a mix of IRA and non-IRA accounts. I see in your tenants in common section you describe some ownership combinations like this but I don’t see this one.
ANSWER:
Whether an individual owns part or all of an investment property, the IRA prohibited transaction rules do not allow for the sell or exchange of personally owned (directly or indirectly) property to his or her own IRA.
Your proposed transaction would specifically run afoul with the the following IRA prohibited transaction rule:
Selling, exchanging, or leasing property
Click Here to read more about the IRA prohibited transaction rules.
A tenancy in common (TIC) transaction is a very specific transaction. For one, the purchase of the investment property would need to be from a third-party (not the IRA account holder).
Provided certain rules are followed, under a TIC transaction, the IRA account holder may be able to invest along sided his or her IRA in the same property. If so, here are some of the main items to consider:
- Only cash can be used to make the investment (no debt);
- The ownership percentages must be based on on amount invested by each party;
- Title to the property must list all parties who invests funds; and
- The income and expenses would need to be split in accordance with the ownership percentages.
