Can we buy rental property in a SEP-IRA?May 22, 2012: 5:05 AM ET
My wife and I are both self-employed and are looking at opening a simplified employee pension plan IRA to offset some of our taxes owed for 2011. We have been informed that we can invest up to $41,000 in a SEP-IRA. Is there a way to purchase a rental property in a SEP account?
-- Robby Huttsell, Mount Juliet, Tenn.
In theory, yes, you can own rental property in a SEP-IRA. In practice, however, it can be a royal pain in the rear, not to mention an ill-advised choice.
First, you have to follow a long list of rules and regulations covering rental property. The property must be in a self-directed IRA, which many firms are not particularly keen on opening. The real estate must be a rental property, not your residence. Plus, all income and expenses must pass through the IRA. For instance, if there's a leaky faucet, you have to use funds from the SEP to pay the plumber. For further information (and possible discouragement) IRS Publication 590 and Code Section 408 outline all of the relevant rules for IRA real estate purchases.
There's more to consider. You can't actively manage the property yourself, even for something as straightforward as collecting the rent, explains Walt Romatowski, a financial planner in Roseville, Calif. You'll need a property manager — perhaps an expense you haven't considered. You also won't have many longstanding tax benefits of property ownership, such as deductions for depreciation.
Another significant downside is the risk. By putting a lot of your retirement moneyinto a single rental property, you'll lose out on the diversification of risk that you get from investing in multiple stocks via a mutual fund. You're putting all your eggs in one basket.
But if you're set on investigating a rental property, San Diego CPA Leonard Wright suggests that your financial stake in the property be low enough so that there are sufficient funds remaining in the SEP account to deal with the unexpected, such as major repairs.
-- Jeff Wuorio
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