Possible to convert an IRA to a Roth with investment properties?

10 Replies

Hello Everybody, 

I've often wondered about this but I've recently talked to a friend of mine who is in this situation. He owns several rental properties that he bought through his IRA with non conforming loans. He's put about 35% or so down on them and was loaned the rest. Would it be possible or even a smart idea for him to convert his IRA to a Roth IRA at this point? What would be required? Would taxes have to be paid on the equity, full value of the properties, or what? From what I understand, having rentals in a Roth IRA would be smart because all rental profit at retirement would essentially be tax free. However, I've only heard of people buying properties in full through their Roth IRA, and don't know what it would take to do a conversion with loans. Any advice would be appreciated.

The conversion would be done it doesn't affect the asset. There may be titling issues unless it is held by an LLC inside of the IRA.

The biggest issue would be the cost out of pocket to roll it over. It cannot be done partially. (you cannot roll over a percentage of a property etc.

A side question: How would one get their existing properties into any SDIRA if the value exceeded the annual contribution limit? For example, if I own a SFH free and clear worth 30K, how do I get that into an IRA when the limit is $6,500?

@Kenneth LaVoie ,

Cannot be done. You would have to sell the property to the SDIRA but you are a disqualified person so that is not allowed.

@Corey G.

Yes it can be done but the properties first have to be appraised and taxes would be due on the value of the properties. 

The taxes would be paid with funds outside of the IRA.

The properties would be assigned to the Roth IRA with the assistance of the IRA custodian.

The conversion is reported in the year that the properties are moved to the Roth IRA and a Form 1099-R would be issued by the following February for filing with your Form 1040 tax return.

See the following.


@Corey G.

This project would definitely require a discussion between your associate and his licensed tax advisor.  Whether a Roth conversion makes sense to any one investor is a complex matter involving so many factors such as age, income, value being converted, cost of conversion, projected future tax bracket, etc.

The cost of the the conversion would be determined based the appraised value of a property, less the outstanding debt.  The converted amount becomes taxable income in the year of the conversion.  If a conversion makes sense for the investor, there would be the secondary question of whether to do individual properties incrementally over time or all at once.

If the properties are held directly by an IRA custodian, there would be paperwork and re-titling to move the properties from the current traditional IRA to a new Roth IRA. If the properties are in an IRA owned LLC, then there is generally not re-titling required. Depending on the custodian, they may want to see the LLC amended to reflect the Roth IRA as the member.

The lenders would likely want to re-do the loan paperwork as well.

At the end of the day, whether the investment asset is stocks or real estate, the concepts and benefits of a Roth conversion are the same.  It is all math, and an evaluation of whether the cost of conversion will be offset by the lack of taxes on future income.  Generally speaking, the higher the rate of return and the longer the funds will be deployed prior to distribution, the more advantageous the Roth option will be.

@Corey G.

Converting traditional IRA to a Roth can be done. I am biased to converting to Roth. Tax the seeds and not the crops. If you are making a 1% return with a cd I would not convert. Making 10% return or better I would convert all day long.

This book saved me and many clients thousands of dollars. “Keep it” by Joe Luby it’s on amazon for less than $20 I believe. 

The benefits of a Roth provide so many opportunities to control your taxes in the future. It can be a legacy you can setup to run for over a century.  

Thanks for all the replies. My friend didn't really know if it would be a good idea but I asked him if his properties were in an standard IRA or a Roth and told him I've often thought about converting my 401K into a Self Directed Roth IRA and then purchasing properties within it. That got the conversation started. So it sounds like you are telling me that you pay taxes on the equity amount of each property you own within the IRA, but that you can do conversions on one property at a time?

So Let's say for example sake, he owns a property appraised at 300,000, has a loan for 150,000 and makes about 7000 dollars net profit a year. Assuming he is 50, will have the same 25% tax rate after retirement, and wants to start taking distributions at 60 lets say. 

150,000 equity x 25% = 37,500 taxes due now to convert this property to Roth and have tax free 7000 dollars growing from now until retirement and potentially 7000 dollars tax free income after age 60. Or keep the 37,500 in regular IRA making lets say 8% for the next 10 years or so and being taxed 25% on 7000 dollar distributions for every year he lives after 60.

Am I correct in my assumptions? Obviously there are a lot of variables but I want to just make sure I have got the gist of it down.

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