How to transfer RE into Roth

10 Replies

Hi guys, I might be confusing something...

But if I understood correctly, it is possible to transfer from IRa that contains real estate into Roth that will contain real estate?

Is that true? Or I misunderstood?

What kind of IRA should it be? Probably self directed IRA? And what kind of Roth account should it be?

Is it even a possibility?

Thank you

Hi @Mary Jay

I think you are probably referring to a conversion where you convert your Traditional IRA into a Roth IRA (Roth Conversion IRA). The Traditional IRA would be converted into a Roth IRA. The conversion is taxable. The assets in the Traditional IRA, including real estate, would be converted into/to the new Roth Conversion IRA.

Originally posted by @Bill Exeter :

Hi @Mary Jay, 

I think you are probably referring to a conversion where you convert your Traditional IRA into a Roth IRA (Roth Conversion IRA). The Traditional IRA would be converted into a Roth IRA. The conversion is taxable. The assets in the Traditional IRA, including real estate, would be converted into/to the new Roth Conversion IRA.

 Thank you! How does the taxing work? Lets say you have a 100K house in a pretax account and want to transfer it into a Roth (after tax account), do you pay 30K in taxes (lets say your tax bracket is 30%)... Approximately... Am I understanding it correctly?

Hi @Mary Jay

Yes, the $100,000 would be added to your income for the year and you would pay tax on the amount based upon your tax bracket. Investors will often wait until the value of an investment drops significantly during a downturn, etc., or until they have a low income year, and then convert some or all of their Traditional IRA funds/assets into a Roth IRA.

I have not done this yet, but probably will in 2021 in my SOLO401K. 

One thing to keep in mind is that to the best of my understanding it is the "Net Value" IF a person has a loan on it. An example would be if you had a 50K loan on that 100K house, leaving you 50K in equity, if is just the EQUITY that you would pay tax on, not the whole value.

Maybe so of the Pros on here could confirm or deny that?

Dan Dietz

@Mary Jay I'm not a fan of putting real estate rentals in an IRA. Real estate rentals are a tax shelter already. If you put them in your IRA you lose their tax deduction benefits. Use your self-directed IRA funds for higher taxed activities related to real estate, such as lending, wholesaling, or occasional flipping.

With that being said, I would recommend that you keep your exiting rental in your pre-tax IRA and when the market is right, sell it for a gain. Then, you can move your funds from your pre-tax account to a Roth account in smaller amounts over time to lessen the taxes on conversion. As @Bill Exeter has pointed out, if you move the property from your pre-tax account to a Roth account, you will owe taxes on the fair market value of the property.

@Daniel Dietz You are correct that the value of your equity is what you are transferring. However, if you attach a loan to a property that you have in your IRA, you may have a taxable event. You also need to be careful that you are not entering into a prohibited transaction (which would be catastrophic). And a property with a loan attached to it within your IRA/401k will then be required to pay unrelated business income taxes (UBIT) on the earnings from your rental until the debt is paid off. This is an advanced strategy that should only be used after discussing the pros/cons with your tax advisor.

@Bob Norton is right on the money!  

Roth Conversions can be tricky when real estate is involved.  They get even trickier when the real estate is leveraged.  There are Unrelated Business Taxable Income (UBTI) and Unrelated Debt Finance Income (UDFI) issues to be aware of.  These transactions should never be done without your tax advisor.  One mistake could result in a taxable event, or in some cases as Bob pointed out, a catastrophic event (disqualified and tax SDIRA).  

Originally posted by @Bob Norton :

@Mary Jay I'm not a fan of putting real estate rentals in an IRA. Real estate rentals are a tax shelter already. If you put them in your IRA you lose their tax deduction benefits. Use your self-directed IRA funds for higher taxed activities related to real estate, such as lending, wholesaling, or occasional flipping.

With that being said, I would recommend that you keep your exiting rental in your pre-tax IRA and when the market is right, sell it for a gain. Then, you can move your funds from your pre-tax account to a Roth account in smaller amounts over time to lessen the taxes on conversion. As @Bill Exeter has pointed out, if you move the property from your pre-tax account to a Roth account, you will owe taxes on the fair market value of the property.

@Daniel Dietz You are correct that the value of your equity is what you are transferring. However, if you attach a loan to a property that you have in your IRA, you may have a taxable event. You also need to be careful that you are not entering into a prohibited transaction (which would be catastrophic). And a property with a loan attached to it within your IRA/401k will then be required to pay unrelated business income taxes (UBIT) on the earnings from your rental until the debt is paid off. This is an advanced strategy that should only be used after discussing the pros/cons with your tax advisor.

Bob, wholesaling (and flipping) are considered an active business and gains from these activities will result in UBIT. Depending on account holder's involvement it may even be considered a "prohibited transaction". 

@Dmitriy Fomichenko I agree.  That's why it's important to work with a CPA that understands real estate investing to make sure that you structure your investing activities in your SDIRA so that you comply with the rules and don't inadvertently enter into a prohibited transaction.