SDIRA & How does this work?

[Kingston Yi]

Self directed IRA's can be used for investing into homes...so I've heard. I have a 401(k) that I'm currently looking to use for my next property and would love to move that into a SDIRA towards an investment. How does this work and what are some key strategies for this?

[Kingston Yi]

What do you mean by, "they would probably take more funding when the property sells?"  - Just meant the fees the custodian takes

Q:  What about funding the property itself, I recently heard that SDIRA's are hard to get loans on, I was just thinking of using my 401k for a down payment on an investment property (20-25% down)

[Basit Siddiqi]

Just because something can be done doesn't mean that you should do it.

I would not own real estate within a retirement account(including SDIRA).

Reasons
1) Complexities with RMD
2) Lose out on depreciation
3) Appreciation when sold would be taxed at marginal rates instead of preferred long-term capital gain rates
4) Etc

[Tabitha Lee Choma]

Quote from @Todd Goedeke:

@Kingston Yi move it into a Solo 401k instead of an IRA. No UBTI in a Solo401k.

If you qualify for a solo401K it is a great plan, but not everyone qualifies for the Solo401K and if you have a solo401K, but don't qualify, there can be pretty hefty penalties in the event of an audit. Including 50% penalty, forced distribution, and if those are pretax funds you'll also add the remainder to your earned income from the year and be taxed additionally at whatever tax bracket that puts you in. I'd hate for someone's investment work to be jeopardized just to avoid UBIT/UDFI.

[Tabitha Lee Choma]

Quote from @Kingston Yi:

What do you mean by, "they would probably take more funding when the property sells?"  - Just meant the fees the custodian takes

Q:  What about funding the property itself, I recently heard that SDIRA's are hard to get loans on, I was just thinking of using my 401k for a down payment on an investment property (20-25% down)

 You cannot use it only for a downpayment, the comingling of funds is not allowed.

3 different ways to fund a real estate deal

1. fund it 100% out of the IRA if you have enough funds to cover the cost of the investment, plus any expenses.

2. Joint venture- partnering with other person/s, entity/ies- whatever percent you go into the deal will stay that percentage for the remainder of the deal for expenses plus any capital gains, and you will be in this deal till the property is sold, unless you can find a Non disqualified party to buy your share.

3. Nonrecourse loans- solely base off the value of the property. 30-50% downpayment, no person guarantee can be made.

[Tabitha Lee Choma]

Quote from @Basit Siddiqi:

Just because something can be done doesn't mean that you should do it.

I would not own real estate within a retirement account(including SDIRA).

Reasons
1) Complexities with RMD
2) Lose out on depreciation
3) Appreciation when sold would be taxed at marginal rates instead of preferred long-term capital gain rates
4) Etc

Taking an RMD from a self-directed IRA that owns property is simple. Say that you owned a property 100% with your IRA and you were told you needed to take an RMD, but you didn't have enough cash in the account to take cash only. Say in this example you were required to take what equaled 10% of the property. We would contact the title company and retitle the deed; instead of the property being 100% owned by the IRA- it is now: 90% ownership of the IRA AND 10% ownership personally. Now there may become issues now with paying expenses for the investment because now that you own 10% of the property in your personal name, you would be responsible personally for 10% of the expenses of that investment.

From my understanding, the need for depreciation is not needed because the IRA is in a tax-sheltered vehicle already, meaning you wouldn't be taxed on the property for selling. The capital gains you would get from selling the property go back into the IRA tax free or tax deferred, depending on if the account was a Traditional or Roth and the only time you would incur taxes is if you took the money out of the qualified retirement account and took it into your personal name as a distribution.

[Basit Siddiqi]

Quote from @Tabitha Lee Choma:

Quote from @Basit Siddiqi:

Just because something can be done doesn't mean that you should do it.

I would not own real estate within a retirement account(including SDIRA).

Reasons
1) Complexities with RMD
2) Lose out on depreciation
3) Appreciation when sold would be taxed at marginal rates instead of preferred long-term capital gain rates
4) Etc

Taking an RMD from a self-directed IRA that owns property is simple. Say that you owned a property 100% with your IRA and you were told you needed to take an RMD, but you didn't have enough cash in the account to take cash only. Say in this example you were required to take what equaled 10% of the property. We would contact the title company and retitle the deed; instead of the property being 100% owned by the IRA- it is now: 90% ownership of the IRA AND 10% ownership personally. Now there may become issues now with paying expenses for the investment because now that you own 10% of the property in your personal name, you would be responsible personally for 10% of the expenses of that investment.

From my understanding, the need for depreciation is not needed because the IRA is in a tax-sheltered vehicle already, meaning you wouldn't be taxed on the property for selling. The capital gains you would get from selling the property go back into the IRA tax free or tax deferred, depending on if the account was a Traditional or Roth and the only time you would incur taxes is if you took the money out of the qualified retirement account and took it into your personal name as a distribution.

I would never own real estate inside of a retirement account.

In your situation of transferring a certain percentage of the property itself instead of cash, you would need to pay a bunch of professionals on an annual basis
A) $600+ for an appraiser
B) $500+ for the title company to transfer ownership
C) $300+ for your accountant to properly adjust your taxable basis for the rental activity reported on your individual tax return.
D) You risk your property taxes being reassessed

You also have to properly split each expense 

Furthermore, since you are not receiving cash, you would need to potentially find alternative methods to find cash to pay your tax liability.

Yes, you are correct, depreciation is not needed/used within an IRA. Depreciation is a benefit to taxpayers because and it helps taxpayers defer taxes if it was outside of a retirement account.
Therefore, again, holding real estate within a retirement account is normally not required / not recommended.

[Todd Goedeke]

@Tabitha Lee Choma anyone can easily be eligible for a Solo 401k by having a side business by end of the year. Become an Uber driver for example.There are many similar businesses that can be opened. It can’t get easier than that.

[Todd Goedeke]

@Basit Siddiqi no one in their right mind should come to you for RE advice since you don t know what you don t know about RE within a Solo401k or IRA.

All the obstacles you mentioned are easy to overcome with the help of a CPA who is unbiased and knows what they are doing.

It’s easy to value RE for RMDs if needed. Roth IRAs and Roth Solo 401k accounts are not required to take RMDs.

[Todd Goedeke]

@Christie Gahan that is incorrect what you mentioned about Solo401ks. You can be your own custodian for a Solo401k. I recommend you read books or (view You Tube)written by IRA Financial founder,Adam Bergman.

The beauty of tax free cash flow of 14%+ ConC and no capital gains taxes ever, far outweigh any lost depreciation deductions.

[Brett Synicky]

Not exactly. The special purpose LLC is designed solely for being owned by the IRA. You are the manager of the LLC which gives you checkbook control. I'll assets and everything within the retirement account will be opened up in the name of the LLC, including the checking account. You will work with your, custodian on any transfers into that new checking account. the plan document provider you choose will handle everything with the irs and state as far as the set up is concerned.

Hope that helps.  

[Basit Siddiqi]

Quote from @Todd Goedeke:

@Basit Siddiqi no one in their right mind should come to you for RE advice since you don t know what you don t know about RE within a Solo401k or IRA.

All the obstacles you mentioned are easy to overcome with the help of a CPA who is unbiased and knows what they are doing.

It’s easy to value RE for RMDs if needed. Roth IRAs and Roth Solo 401k accounts are not required to take RMDs.

I know what I am doing. I obtained financial freedom at 35 years of age.
I am not trying to sell a retirement account like others are.

Real estate outside of a retirement account > real estate inside of a retirement account.

 
Just because something can be done, doesn't mean it should be done.

[Basit Siddiqi]

Quote from @Todd Goedeke:

@Tabitha Lee Choma anyone can easily be eligible for a Solo 401k by having a side business by end of the year. Become an Uber driver for example.There are many similar businesses that can be opened. It can’t get easier than that.

LOL the advice given to high net worth individual is to tell them to become an uber driver for a few hours a year?

I know all I need to know now regarding your services.

[Christie Gahan]

Quote from @Todd Goedeke:

@Christie Gahan that is incorrect what you mentioned about Solo401ks. You can be your own custodian for a Solo401k. I recommend you read books or (view You Tube)written by IRA Financial founder,Adam Bergman.

The beauty of tax free cash flow of 14%+ ConC and no capital gains taxes ever, far outweigh any lost depreciation deductions.

This thread is getting complicated.  Kingston is not self employed and wrote that he has a 401k.  I didn't write anything about a Solo 401k.  
   My point is that, you don't want to underwrite your deals with a "standard" or "non self directed account" point of view.  Do not go this route if you are looking for depreciation.  I reccomend books by James Lange such as Roth Revolution and Retire Secure!  It is best to know what kind of account you already have ( IRA, 401K etc)  read the books just thinking about what you already have.  If you skip around between IRA,401k,SEP etc you may get the information all mushed together in your mind and it will be confusing.  Figure out what you have and then research your Self Directed and/or Roth options.  Always check with your accountant.  ( Not somebody that prepares tax returns.  An accountant or lawyer that loves strategy)   If you don't follow the rules, it may not be worth doing.  There are some massive tax savings here but the IRS does not make it easy!

[Todd Goedeke]

@Christie Gahan it’s impossible to fact check what you did or didn’t t say when you remove your post! Funny , how that works.

[Jason Watson]

My opinion is enlist the services of a trust company that can properly set this up and help you with compliance.

Who wants to talk about 990-Ts and when to file? Anyone? No? Bummer...

[Christie Gahan]

@Todd Goedeke   My post is near the top of the thread ... where it has always been.   I don't know why you would think I would take it down.  Kingston asked a question.  I answered the question.  Kingston thanked me for my comments.