Self directed llc down payment

[Mark Burlison]

Have a down payment for my first property in a 401k. My accountant mentioned self directed ira llc's. He really didn't know much...but had heard of them. Trying to sort through the info...I am over 59 1/2. Asked a company today that sets these up and they said I could use one for my down payment, then finance my purchase. So how would that work with my down payment ONLY coming from a self directed IRA LLC. Am I still restricted by all the rules of a self directed IRA????? Some even question the legality of this maneuver with the IRS. Thanks for any input.

[Scott Nidell]

Try Quest IRA. They specialize in this sort of thing

[Brian Eastman]

@Mark Burlison

If you setup a self-directed IRA and then use those IRA funds for down payment on a property, then it is the IRA, not you, that is purchasing that property. The transaction would be subject to all appropriate IRS rules, meaning keeping things entirely at arm's length and separate from yourself and close family.

The IRA would make the down payment and need to obtain a non-recourse loan - meaning no personal guarantee from you. The lenders that offer such loans typically want 30-40% down and 10-15% cash on hand in the IRA as reserves.

The IRA pays all expenses associated with the property such as the mortgage, property taxes, insurance, repairs, etc.

The IRA receives all income produced by the property after paying expenses.

The percentage of the income that the IRA receives as a result of using the non-IRA (borrowed) money is taxable to the IRA as Unrelated Debt-Financed Income (UDFI). This tax typically does not add up to much, but is something you would want to fully understand before engaging in such a transaction.

So, if the IRA can manage the above and expect better return on investment that what it is invested in today, it makes sense.

If you were thinking the IRA is a source of funds available for you to acquire an investment property - which it kind of sounds like - then you need to head back to the drawing board.

The fact that you are over age 59 1/2 only means that you have the ability to take taxable distributions from the IRA without penalty. What happens inside the IRA is still tax-sheltered and therefore subject to the same rules as before age 59 1/2.

[George Blower]

@Mark Burlison

• If the property is owned by the IRA LLC or the IRA, you cannot later use personal or business funds to improve or to finance the improvements.

• However, the IRA LLC or IRA can obtain a non-recourse loan from a third-party. 

• The use of debt financing will trigger UDFI, however, if done under an IRA LLC or IRA. https://www.irs.gov/irm/part7/irm_07-027-008

• Therefore, you may want to look into opening a solo 401k plan if you are self-employed as UDFI does not apply to 401k plans. 

Following are some good resources:

https://www.irs.gov/retirement-plans/one-participa...

https://www.irs.gov/pub/irs-tege/forum08_401k.pdf

https://www.wsj.com/articles/investing-in-real-est...

 

[Alina Trigub]

@Mark Burlison @Brian Eastman gave you a pretty good summary on SDIRA rules and on your age. Now you need to decide whether to leverage SDIRA or solo 401k for this purchase assuming allowed by law or withdraw funds from IRA to buy it.

When using SDIRA, some of the funds are subject to UBIT ( taxes). When buying with cash, your rental income will be taxable. However you will also be able to use the depreciation to offset some (or all) of your rent-able income in the earlier years of purchasing a property. 

Bottom line, I'd consult with your tax adviser on the overall pro's and con's of each of the strategies. 

[Justin Windham]

@Mark Burlison

Welcome to BP! If you're eligible for a Solo 401k, you'll pick up quite a few benefits compared to the IRA LLC:

• Compared to an IRA, Solo 401k contributions limits are roughly ten times higher.
• There is no custodial requirement for the 401k.
• You don't need the additional expense and administration of an LLC to have checkbook control.
• There is a built in-Roth component whereas IRAs are either traditional or Roth, not both.
• A spouse can also participate in the same Solo 401k plan.
• The Solo 401k has additional tax benefits over an IRA when investing into real estate using leverage.
• The penalties for prohibited transactions are less severe, though it's best not to utilize this benefit :)

[Mark Burlison]

Thank you all for the input. I’m virtually a complete novice to real estate investing and looking to pick up my first piece. Even tho I’m over 591/2, taking the funds directly out of my (ATT) 401 K incurs to many tax liabilities. I now can see this definitely has to be purchased through the sdira to offset the tax’s. I’m just going to withdraw enough for the down payment... which now I understand I have to have a non-course loan....which blows my plan of going to my favorite bank! Not sure if this type of loan will be harder to get or require more down payment. Also trying to sift through all the fees charged by a administrator for a sdira. It’s all pretty daunting....trying to get all the info. But I’ll continue to plow forward.

[Justin Windham]

@Mark Burlison

Non-recourse loans usually require a minimum of 30 - 40% down. IRAs have to pay UDFI tax on income from leveraged assets. If you have determined that you are ineligible for a Solo 401k plan, a self-directed IRA can still be a great investment vehicle.