This is a multi-part question.  I have some money in my SEPP plan and
I am pretty sure I can invest in real estate and I was wondering if it
goes into real estate, can I leverage?  If the answer is yes, does the
principal reduction on the debt become a taxable event or is it tax
free as long as I keep it in a tax deferred vehicle?  This is what I
am thinking - if I invest $250,000 of my SEPP into real estate and
purchase a $1 million piece of real estate with a $750,000 mortgage,
and the real estate has a single tenant on a 20 year lease - can I pay
off the mortgage and own the asset free and clear of debt at the end
of the lease term?  And avoid paying phantom income taxes?  Thanks for
your help.

You can invest your SEP-IRA in real estate.  However, you have to find
a trustee for it that is willing to allow you to purchase real estate.

"Finally, IRA trustees are permitted to impose additional restrictions
on investments. For example, because of administrative burdens, many
IRA trustees do not permit IRA owners to invest IRA funds in real
estate. IRA law does not prohibit investing in real estate but
trustees are not required to offer real estate as an option."

"FAQs Regarding IRAs" Internal Revenue Service
http://www.irs.gov/retirement/article/0,,id=111413,00.html#19

Equity Trust Co. is one such trustee I have found.  Their web site has
considerable information regarding real estate investing in IRAs that
you will find useful, including specific procedures regarding how it
is done.  While you can leverage your IRA real estate investment
through a mortgage, your IRA may then be subjected to taxation for
unrelated business income tax.  Furthermore, a non-recourse loan must
be used, which may incur a higher interest-rate than a conventional
mortgage.  Furthermore, all of the lease income must go into the IRA
and the mortgage payments must be made from the IRA if they are to be
tax-deferred.

"Real Estate IRA FAQs" Equity Trust Company (2005)
http://www.trustetc.com/real-estate-ira/real-estate-ira-faq.html

"In general, IRA investments should be bought outright, as any use of
debt financing might incur the production of unrelated business income
tax (please see Unrelated Business Taxable Income and Your IRA). If
debt financing is used, it must be in the form of a non-recourse loan,
meaning that, if your IRA fails to make payments, the only collateral
the lending institution can come after is the property itself, and not
the IRA. IRAs may purchase an undivided (and proportionate) interest
in a property, which would eliminate the occurrence of UBTI."

"What if I do not have sufficient funds in my IRA to purchase a
property outright?" Equity Trust Co. (2005)
http://www.trustetc.com/real-estate-ira/real-estate-ira-faq.html#funds

"If your IRA owns an asset that produces unrelated business taxable
income, your IRA may be subject to taxation under section 512 of the
IRC. Generally, investments that can generate UBTI include limited
partnerships, limited liability companies, and any investment that
incurs debt financing and/or is involved in an unrelated business."

"Unrelated Business Taxable Income and Your IRA" Equity Trust Co.
(2005) http://www.trustetc.com/self-directed-ira/ubti-ira.html

Links to relevant IRS publications are at the bottom of the above
link.  The tax issues can be quite tricky, so I strongly encourage you
to consult with a professional tax adviser.

Sincerely,

Wonko

Search Terms: "real estate" "simplified employee pension plan"

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Request for Answer Clarification by exceedpotential-ga on 16 May 2005 08:00 PDT

Your response is greatly appreciated.  Let me digest what you sent so
I can ask a few questions and get you paid.  If I can get you paid
immediately and still ask questions I will do that.  If you know how
it works - let me know.  I'm not sure how the process works, since I
am just starting to use this excellent service.

Thanks,

Exceedpotential

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Clarification of Answer by wonko-ga on 16 May 2005 13:43 PDT

I have been paid for my original answer.  You are allowed to request
clarification of your original question at no extra charge.  If the
clarification requests move beyond the initial scope of your original
question, however, then you will need to post them as new questions
with the corresponding additional fee based on your asking price for
the Answer.  Any  Researcher would then be able to answer your new
questions unless you elected to direct them to me, Wonko, personally.

I hope that clarifies how the system works.  If anything is unclear,
please request clarification, and I will clarify.

Sincerely,

Wonko