Most custodians that will hold a property will provide you with information about the ins and outs but if you read their materials closely, it is likely you will see the ultimate responsibility for complying with all the rules (prohibited transactions, self-dealing and others) rests on the client. We strongly recommend clients retain their own counsel. If there is an error, the entire IRA can be deemed taxable.
Clearly, considering all the costs and potential costs of the property and the professional assistance needed to do this well and protect a client’s interests, the selection of a property is critical. The rent needs to cover much more than the mortgage. Working with a good real estate agent is important as is exercising enough patience to find a really good property.
If clients are still wanting to own a rental, they should consider their estate plan carefully. Here I’m not thinking of taxes at all. I’m thinking of the client and the heirs while they are alive. The client may be fine with all that rentals entail but they will not be able to attend to the property matters forever. What started as a side gig or a hobby of sorts can easily turn into a source of stress when it is least needed.
Is the surviving spouse or other heirs capable and willing to deal with the complexities of owning a rental? Could they handle the ins and outs and lawyers and tax advisors that come with selling a property?
One last observation: Often, clients are presented the opportunity to draw rental income as
an easy “no brainer”—and they must act fast. These are common sales tactics but also classic signs of outright scams. If rentals are an acceptable part of your client’s retirement, they are probably better off learning the ropes and being patient before buying a property. It is highly likely that a good option will arise in time.
Now, don’t misunderstand. We have clients with rentals. Some have done very well. Rentals are indeed good fits for some people. They just aren’t all that simple or easy. I bring up all these negatives because people selling properties for rental possibilities often don’t. Part of my job as a financial planner is to insert the real world into the theory and to make sure clients understand the pros and cons of various courses of action.
Dan Moisand, CFP, has been featured as one of America’s top independent financial advisors by Financial Planning, Financial Advisor, Investment Advisor, Investment News, Journal of Financial Planning, Accounting Today, Research, Wealth Manager, and Worth magazines. He practices in Melbourne, Fla. You can reach him at www.moisandfitzgerald.com.