Buying Turnkey Using An IRA or 401(k) - Jump Starting the Process

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Buying Turnkey Using An IRA or 401(k) - Jump Starting the Process

Account Closed
Specialist · Paradise Valley, AZ · Member since 2018 · 3k+ posts · 2k+ votes

@Brian Eastman I took you up on your offer and started the Thread: My Question was:

I sell Turnkey properties that I have taken over the loan Subject To. The loan stays in the name of the seller. Title transfers. It's done through escrow. Can someone with a SDIRA or Solo 401(k) etc buy the Turnkey ?

The numbers work this way. The value of the house is $225,000 with an underlying loan of $165,000 and I sell the Turnkey for $50,000. - So, a $50,000 fee comes from the Solo 401(k) to me.

Title is transferred to their Solo and the Solo 401(k) takes over making payments on the underlying loan that is not in their name. They do not assume the loan in the traditional sense. Or, is that a disallowed transaction?

If they can buy the Turnkey though their SDIRA or Solo 401(k) do they get the same depreciation and tax write-offs an individual would?

Your Answer: (For those who have the same Question)

Brian Eastman

Self Directed IRA & 401k Advisor from Boulder, Colorado

Best to start a new thread for something like this.

IRS rules simply prohibit an IRA or 401(k) account holder from placing a personal guarantee on a debt instrument. If the subject to transaction achieves this, which most do, then there is no issue.

The use of debt-financing does create a tax liability for an IRA investor. The percentage of income attributed to debt-financing is considered unrelated debt-financed income (UDFI). So, if a property is 60% debt-financed, 60% of the income is considered taxable and 60% of the normal deductions such as depreciation, interest on the note, etc. would apply to reduce that taxation.

UDFI taxation to an IRA typically does not add up to much. It would probably be about $250-$300/year in the example you are providing - depending on rent and expense figures. UDFI is a small cost for the benefits of leverage.

A Solo 401(k) is exempt from taxation on UDFI when the debt instrument is used for the acquisition of real property. A subject to deal is still considered acquisition indebtedness.

Brian Eastman

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Brian EastmanPro Member
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
7y

@Account Closed

Ignore the previous post.  The respondent did not read your messages thoroughly.

To your earlier post, yes we do offer plan services.  Discussion of such services is best handled off line and not in the forum space. 

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  • Account Closed
    OP
    Specialist · Paradise Valley, AZ · Member since 2018 · 3k+ posts · 2k+ votes
    7y

    @Brian Eastman So the next question is can you provide the services needed for someone to set up their Solo 401(k) to buy Turnkey properties and how long does the process take?

    Do you work with Thrift Savings Plans (TSP) for Active Duty servicemen?


    0Reply
  • George Blower
    Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
    7y

    @Mike M.

    Such transaction is not allowed if you are on both sides of the transaction as you would be considered a disqualified party. 

    Yes a solo 401k plan can invest in notes secured by real estate, for example.

    0Reply
  • Account Closed
    OP
    Specialist · Paradise Valley, AZ · Member since 2018 · 3k+ posts · 2k+ votes
    7y
    Originally posted by @George Blower:

    @Mike M.

    Such transaction is not allowed if you are on both sides of the transaction as you would be considered a disqualified party. 

    Yes a solo 401k plan can invest in notes secured by real estate, for example.

    Maybe I misunderstand. 

    It isn't my 401(k). The investor has a 401(k)  that would buy the Turnkey. 

    I buy properties "Subject To" using personal cash, I'm not using a 401(k). (Title transfers to me, I take over paying the loan but the loan stays in the name of the seller.) I fix up the property and put a Tenant in. Then I am selling the property as a Turnkey. 

    The investor is buying the Turnkey in his 401(k). The loan is not in my name and the loan is not in the investor's name. The loan remains in the name of the original seller. (confusing, I know, but it works ;-)

    I guess I'm not clear how I become a disqualified party.

    0Reply
  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
    7y

    @Account Closed

    Ignore the previous post.  The respondent did not read your messages thoroughly.

    To your earlier post, yes we do offer plan services.  Discussion of such services is best handled off line and not in the forum space. 

    1Reply
  • Account Closed
    OP
    Specialist · Paradise Valley, AZ · Member since 2018 · 3k+ posts · 2k+ votes
    7y
    Originally posted by @Brian Eastman:

    @Account Closed

    Ignore the previous post.  The respondent did not read your messages thoroughly.

    To your earlier post, yes we do offer plan services.  Discussion of such services is best handled off line and not in the forum space. 

     Details and clarity are required in such matters as these. I'll be giving you a call.

    0Reply
  • Justin WindhamPro Member
    Banker · Nationwide · Member since 2015 · 4k+ posts · 1k+ votes
    7y

    @Account Closed

    Prohibited transaction rules are the main obstacle that self-directed IRAs and Solo 401ks introduce when contrasted with non-retirement transactions. If the retirement account is not transacting with disqualified persons in the process of purchasing the turnkey property, this is likely allowable.

    1Reply
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