Actuaries Unlimited, Inc. Monthly Digest
Real Estate in a Qualified Retirement Plan
by Mindy Gassman, Enrolled Actuary, MSPA, CPC, MAAA on January 19, 2017
A qualified retirement plan may hold assets in the form of real estate. Owning real estate in a retirement plan can seem cumbersome initially. Before making a real estate purchase you should be aware of the following rules:
- The plan document must allow the plan to purchase real estate with existing plan assets.
- The plan may not purchase, sell, exchange or lease the real estate to a party in interest.
- The plan may not pay commissions or management fees to a party in interest.
- Income derived from a debt-financed property will generate Unrelated Business Taxable Income (UBTI).
Upon the purchase of real estate, other rules take effect. Below are some guidelines to follow during the lifetime of the plan when maintaining real estate. These guidelines will help to avoid any prohibited transactions which would jeopardize the plan’s qualified status:
- The real estate must be valued annually by an independent third party appraiser.
- If the plan covers rank and file employees then an ERISA bond must be maintained for an amount no less than the current market value of the real estate.
- All costs to maintain and improve the property must be paid by the plan. All rental income received from the property must remain solely in the plan.
Most participants in small qualified retirement plans eventually receive a distribution and roll the money into their personal IRA. While real estate can be rolled over to an IRA, the custodian fees may be excessive. Furthermore, distributions from a qualified retirement plan are generally taxed as ordinary income, whereas gains from real estate held by an individual may qualify for more favorable capital gains treatment. Therefore, the tax advantages associated with holding real estate in a qualified retirement plan may be lost.
Real estate may be an attractive and viable investment in a qualified retirement plan. However, clients should carefully consider the advantages and disadvantages and consult with their tax advisor before purchasing real estate with qualified retirement plan assets.
Mindy learned at a young age that the keys to success in the pension industry are integrity, loyalty and hard work. She started at Actuaries Unlimited, Inc. (AUI) while earning her degree in Mathematics from UCLA and eventually went on to become a Pension Administrator, Enrolled Actuary and President of Actuaries Unlimited, Inc. Mindy prides herself on her discerning eye and her commitment to quality, and believes that it is the duty of AUI employees at every level to provide our clients with accurate, professional and timely work.
In addition to running a business, she lectures fro CPA and CFP Continuing Education Seminars and Conferences. Together with her husband Joel, Mindy lives in Beverly Hills and enjoys spending time with her three grown children.