Can a Rollover IRA Include Income Property?

by Mark Kennan, studioD

Rollover individual retirement accounts simply refer to IRAs that have money in them that started out in other qualified retirement plans, like a 401(k), 403(b) or even another IRA. But, once you've got your money in the rollover IRA, the investment rules are the same for owning investment property as they are for any other IRA.

Rollover Process

When you do a rollover, you can move property from another qualified retirement account to your IRA instead of selling the assets and rolling over cash. In fact, if you take property out of your other retirement account, you must deposit the same property into the IRA to complete a valid rollover. For example, say you took out a rental condo from your other retirement plan instead of selling the condo and receiving cash. To complete the rollover to an IRA, you must contribute that condo into your IRA rather than depositing the equivalent value in cash.

Income Property Permitted

You can own income property in a rollover IRA just like you can own income property in a non-rollover IRA. The IRS only prohibits people from owning collectibles and making personally beneficial investments, like buying a vacation home under the guise of "real estate investments" or buying stock in your own business. Of course, the property has to be titled in the name of your IRA trustee for your benefit, not in your own name. For example, if your IRA has an apartment complex, you wouldn't have the deed in your name. Rather, you would title it "IRA Trustee FBO Account Holder."

No Personal Benefits

If you have your IRA owning income property, such as a rental apartment or vacation home, you can't be using it for personal or family benefit. Your family includes your spouse, your ancestors like parents, grandparents and great grandparents, and your descendants and your decendants' spouses -- so your kids, grandkids and great-grandkids are all out, too. But, the IRS doesn't include your siblings, cousins or other relations. So, if you really wanted, you could hire your brother to manage the property and rent it to your aunt.

IRA Tax Return

Depending on your income property, your IRA might have to file its own tax return when it has unrelated business taxable income, or UBTI. The IRS exempts stock gains, interest, dividends and profits from UBTI for IRAs, but not rental income or passive income from a company owned by the IRA. For example, say you use an LLC to manage your rental property in your rollover IRA. That still counts as rental income even though the income passes through the LLC.

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About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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