Ask the Expert: Obey Roth IRA ownership rules

Can my Roth IRA own a condo or a house? If so, must money for expenses - property taxes, insurance, etc. - come out of the Roth IRA each year?

A Roth IRA can own real estate, but it's a real hassle. Yes, all money for expenses must come from inside the IRA. You can't claim tax deductions or depreciation on the property since it's inside the IRA. And you must obey very strict rules against "self dealing."

It's illegal for you or your relatives or any entity in which you or they have a controlling interest to receive any goods or services from your IRA; to sell assets to your IRA or buy assets from it; to lend to, or borrow from, your IRA; or to use it as collateral for a loan.

You can't do any of these things directly or indirectly. Looking for tenants, collecting rent or making repairs might be deemed a violation of the rules - and the penalty is termination of your IRA, which triggers taxes on its entire value.

That's not all. You're legally required to have a third party administrator, or custodian. Any bank, broker, mutual fund company or insurer will act as custodian of an IRA invested in stocks, bonds and mutual funds. But very few firms act as custodians for unconventionally invested, "self-

directed" IRAs. Not surprisingly, they charge higher maintenance fees. Real estate investing also often involves legal and accounting costs.

In addition to assuming these legal burdens and extra costs, you'd be investing a big chunk of your IRA in an undiversified, illiquid asset that eats money. It's much easier and cheaper to sell mutual fund shares than a condo.

The bottom line Investing an IRA in real estate is difficult, expensive and risky.

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