NEW RULING -- Real Estate in ANY IRA? | Episode 194 - a podcast by Bryan Ellis - SelfDirected.org

Do you have an IRA at a conventional custodian – like Charles Schwab or Fidelity or Ameritrade – and wish you could buy real estate inside it?  Well now… because of a new court ruling… you can!  But should you?  I’m Bryan Ellis.  I’ll give you all of the powerful details RIGHT NOW in episode #194.

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Hello SDI Nation!  Welcome to the podcast of record for savvy self-directed investors like you!

What a great day to be alive, people!  Don’t you agree?

So there’s some BIG NEWS on the legal front that you, as a well-informed self-directed investor need to know… particularly for those of you who have IRA’s at conventional brokers and wish you could buy real estate or other assets – other than just stocks & bonds – inside those accounts.

On February 24 – two days ago – a really, really interesting ruling in US tax court came down.  And I’ve got to say a big thank you to attorney extraordinaire Tim Berry – host of the upcoming new podcast SDI Money Law… a GREAT show, my friends – for turning me on to this information.  For you legal beagles in the audience, I’ve posted a link to this decision on today’s show page, which you can find at SDIRadio.com/194.

So here’s the deal…

The IRS decided to pursue a fellow named Raymond McGaugh for taxes, penalties and interest in connection with some activity in one of his IRA’s.

Mr. McGaugh held a self-directed IRA at the big stock brokerage Merrill Lynch.  Now Merrill Lynch is as conventional Wall Street as a company can be.  They offer “self-directed” IRA’s… but Merrill… like virtually every other Wall-Street based custodian… only allows their clients to self-direct to the extent that Merrill will sell the type of product that the account holder wants to buy.  So if you want to buy publicly-traded stocks, bonds or mutual funds, you’re in luck.

But Mr. McGaugh wanted to buy something different from that.  He wanted to buy shares of a privately-held company… in other words, a company that is NOT traded on Wall Street.  McGaugh seems to have done his homework… he knew that such an investment wasn’t inherently prohibited by the tax code, and since he had the available capital to make the investment, he instructed Merrill to purchase $50,000 work of that private-company stock on behalf of his IRA.

But Merrill balked.  Remember… virtually all IRA’s that are billed as “self-directed” are only self-directed as far as the custodian can conveniently profit from the sale of the asset to the account owner.  And Merrill certainly couldn’t conveniently profit from this, even though the tax code clearly allowed it.  Thus, Merrill refused to honor Mr. McGaugh’s request.

Well, McGaugh was determined.  So he instructed to send a wire transfer $50,000 directly to the company from whom he was purchasing stock, which they did.  He also instructed the company to issue his shares so that they were owned by McGaugh’s IRA rather than by himself personally.

There are some other details of course, but the gist of the story is that McGaugh performed an end-run around Merrill’s restrictions for their self-directed IRA accounts.

How does Merrill respond?  Not well.  In their tax statements to the IRS for McGaugh’s account, they indicated that McGaugh had withdrawn $50,000 from the account.  And that got the attention of the IRS, who certainly wanted their pound of flesh from that money.

So, the IRS tries to hit up Mr. McGaugh for a bunch of money, but he won’t have any of it.  The issue went before tax court, and the ruling that was issued is VERY good for Mr. McGaugh and very interesting more generally.

Bottom line:  The tax court ruled a few things:

First, that the asset that McGaugh was purchasing wasn’t prohibited.  So they, in effect, re-confirmed the efficacy of investing in alternative assets.

Second, the tax court ruled that McGaugh had NOT performed a withdrawal of his funds because he was never in receipt of those funds.  The funds were paid from the custodian to the seller of the company in whom Mr. McGaugh was purchasing shares, and that company, in turn, issued shares of ownership to Mr. McGaugh’s IRA.  And the tax court blessed the transaction as being compliant with the tax code.

So what does this mean?

On the surface, it looks like it means that you could use your conventional IRA to purchase non-conventional assets, so long as the funds are paid to the appropriate parties and that the assets purchased are titled in the name of your IRA and not your personal name.

But let’s not get too hasty with this.

Here’s the thing… It’s entirely possible that Merrill – or whichever conventional custodian you use – has other language in their account agreement to which this transaction may be subject which could cause trouble for you if you wanted to do so.

But even if they don’t, I’ve got to tell you… I think it’s a HORRIBLE idea to use this newfound freedom to force your IRA custodian to buy assets with which they’re not accustomed to interacting.

Imagine it was you buying real estate instead of private stock.  Do you think Merrill Lynch – or the other conventional custodians – have the first clue about the complexities of buying real estate in an IRA?  Almost certainly not.  Will they know what to do if a property tax bill is sent to them rather than to you?  Will they know how to handle it if – God forbid – you have legal troubles with that property – even as minor as an eviction – and the custodian begins receiving volumes of legal documentation?  I’ll bet the fees you’d have to pay would mount up very, very quickly.

So, is it plausible that you now have the ability to buy unconventional assets through a conventional IRA?  Yes, it’s plausible, as the case that I’ve linked to at SDIRadio.com/194 plainly shows.

But is it wise?  I’d have to say NO.  But this case is likely to be of great benefit for any of you who, maybe like Mr. McGaugh, chose to aggressively push your wishes onto your custodian.  Now, at least, you’ve got some legal cover.

My dear friends… THANK YOU for listening in today!  I have a sincere request for you… please go over to iTunes and give this show a 5-star rating if you like it.  That helps us so very much, and it’s totally FREE for you to do.  You can get to our iTunes page at SDIRadio.com/iTunes.

My friends… it’s good to be alive.  No matter the weather, it’s a beautiful day.  Thank you, God for another rotation of the globe, another day full of challenge and opportunity, another day to live out loud and make the most of this amazing world You’ve made!

And, without a doubt, my friends… invest wisely today, and live well forever!

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