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T H E P R I M E R U S P A R A D I G M
Stephen L. Smith has more than 30 years' experience in tax
planning. The largest part of his day-to-day practice is working with
people in the area of tax advantaged real estate transactions such as
like-kind exchanges, real estate investments by IRAs and qualified
plans and related areas, and estate planning. He recently published
the book IRA and 401(k) Investment in Real Estate for Syndicators,
Other Real Estate Professionals and the Rest of Us, which expands
upon some of the topics addressed in this article. For more
information, visit his website at www.realestateinira.com.
Horack, Talley, Pharr & Lowndes, P.A.
2600 One Wells Fargo Center
301 South College Street
Charlotte, North Carolina 28202
704.372.2500 Phone
704.372.2619 Fax
ssmith@horacktalley.com
www.horacktalley.com
Stephen L. Smith
I became interested in the subject of
IRA investment in real estate some years
ago when an investment opportunity
came up in the Phoenix area and I
did not want to use all of the funds I
had available in my bank account. I
therefore turned to my IRA and made
the investment, partnering with my IRA
so that I provided some of the funds
needed for the investment and my IRA
provided a smaller portion of the funds.
That investment has since been sold
at a significant profit and the proceeds
reinvested. As a result, my IRA now
owns a percentage interest in a limited
liability company which owns a small
shopping center in Goose Creek, South
Carolina.
As it has become obvious in the
last few years that we cannot depend
on Social Security and investments in
the stock market for our retirement, I
have become more and more interested
in the notion of IRA investment in real
estate. Even if investment in real estate
is not totally the answer for you, then
investment in real estate at least provides
some diversification from investments
in the stock market. The same general
concepts also apply to 401(k) plan
account investments in real estate but
with some additional complications and
opportunities that are more particularly
described in my book.
Allowable Investments
in your IrA
The way the rules are laid out, the real
question is what can I not invest in
rather than what can I invest in, because
the answer is your IRA can invest in
anything with three specific exceptions.
You will not find any specific rule in the
Internal Revenue Code as to what an
IRA can invest in. Rather you will only
see rules specifying the limited things
IRAs cannot invest in.
what can I Not Invest In
There are three specific items in which
you cannot or should not invest your IRA
as follows:
1. A life insurance policy on the life of
the IRA owner.
2. Collectibles, with certain exceptions.
3. Subchapter S corporation stock.
Two of these three items are
discussed more specifically below.
what Are collectibles and
what Are the consequences
of Investing in them?
The following are collectibles: works
of art, rugs, antiques, metals (except
as provided below with respect to
certain coins), gems, stamps, alcoholic
beverages (e.g., vintage wines),
musical instruments, historical objects
(such as documents or clothes), most
coins (see below) and other items of
tangible personal property that the IRS
determines are collectibles. There is an
exception allowing investments in one,
one-half, one-quarter or one-tenth ounce
U.S. gold coins or one-ounce silver coins
minted by the Treasury Department
as well as certain platinum coins and
certain gold, silver, palladium and
platinum bullion.
The impact of investing in a
collectible is that the investment is
regarded as being distributed to the
IRA owner at its fair market value in
the year of the investment and as if
IRA Investment in Real Estate
North America