SDIRA custodians in KS? Also quick ? on the rules of lending?

Question

Hi all - I'm a relative novice on the subject of using an IRA to invest in Real Estate and am familiar with the basics.

I am in partnership with my father in "XYZ" LLC.  Our LLC presently owns 4 properties (1 duplex, 1 single family home and 2 vacant lots - set to build a new construction duplex this fall on one).

My dad is 64 and I think is finally coming around after 10 years of us being in this partnership (we each have around $25k of our own initial capital invested -- Properties are worth around $350k total - when we build the duplex the # will go up to $487.5k with one duplex built and $650 w 2 built. -- Our LLC will be in partnership with another individual who will help me complete the build and I'm assuming 50/50 splits on the new const builds.

So to get to my question - I have been pitching the idea to him that he could use funds in his 401k/IRA accounts to invest in additional real estate (If you read my other posts and my profile I've been focusing on a niche of renting to college kids here and want to expand that as I have been getting the word out amongst students thats what I do).

Heres my scenario -- We are 50/50 partners in "XYZ LLC" -- can he set up an IRA to lend funds to the "XYZ LLC" (ie either a cash transaction for a property where we use funds to act quickly to purchase and then refinance later, or use the funds as a 20% down payment coupled with traditional financing etc)

The mortgage on the property would be in "XYZ LLC's" name and the mortgage would either be tied to his IRA, or bank if we get traditional financing/however we end up purchasing.

He is a completely passive member of the LLC as I am active and handle day to day and he also lives in a separate city if that matters.  So as far as the test of not being active in the property or any of the activities he will pass that.

Also second scenario - he lives in city A -- wants to move back to City B where I live and they've picked out a property to buy already which will be a private sale without a RE agent.  Is there anyway to minimize the tax liability of pulling out 401k/IRA funds for the downpayment on property in City B?  He was thinking about purchasing property in City B with all cash but was worried about the income tax bill he'd get - I'm thinking it's wiser to just pull out 20% for the downpayment then get a mortgage for the rest and pull the money needed for the payment out of the IRA/401k as needed.

Thanks for reading my long post and hoping to learn more about this subject.  My whole goal is to get my parents set up (as well as myself eventually) where the business I am trying to build will help them out on their income through the cash flow or me eventually buying out their stake later etc.  They do not have a large nest egg in my opinion to set them up like they need in their golden years so trying to help how I can.  I'm hoping he listens to me as well and gets most of his stuff out of items tied to the stock market now before the election - I see a correction ahead and it's probably not good for him to have his money allocated in a risky way at this point in their lives.

If anyone has a suggestion on an IRA custodian in the fine state of KS or somewhere close - Oklahoma City, Wichita or in the Kansas City area it would be greatly appreciated.  Look forward to the replies.

Account Closed · Answer

Re: the second scenario, since he is over 59.5, he can take distributions from the IRA/401k without the 10 percent penalty tax. But, they are taxable as ordinary income in the year they are taken. (I am assuming they are not Roth's, in which the taxes were paid in the year the contributions were made.)

Also, consider that 10-15 year mortgages are running 2.75% in Kansas, and even a low risk bond-focused allocation in his IRA/401k, preserving principal, would earn at least that on funds he leaves in the accounts.

I think your inclination is the correct one: he'd take the tax hit on the distribution for the 20% down payment, and finance the rest. Of course he could do 80-15-5 or similar financing, and further minimize the taxes on the distribution. If his credit is good he might get a low enough rate on the 15% home equity loan that those IRA funds would out-earn the interest paid.

Alan Peil · Answer

Shane,

You may want to visit with Entrust if you wanting to set up a SDIRA (self directed IRA).  I recently set one up with them and intend on using it for real estate investment.  Let me know if you would like further information.

Kim Tucker · Answer

No sorry, no IRA custodians that I know of in those states, although reps visit regularly.

Mark Nolan · Answer

@Shane H.

While you don't need a custodian who is located near you, sometimes it helps especially if you want to sit down and discuss paperwork.

With Whom Can You Make IRA Investments?

Who’s Out

• You
• Your Spouse
• Your natural parents and/or your adoptive parents
• Your natural grandparents
• Your natural children and/or your adopted children
• The spouses of your natural children
• Any fiduciary of your IRA
• Any people providing services to your IRA–such as your  stockbroker–as well as his employees and both his and his  employees’  blood relatives
• Your IRA custodian or administrator

Who’s In

• Your brothers and sisters
• Your Spouse’s brothers and sisters
• Your spouse’s parents
• Your spouse’s grandparents
• Your stepchildren
• Your spouse’s stepchildren
• Your grandparent’s spouse, if not your natural grandparent
• Your aunts, uncles, and cousins

Dmitriy Fomichenko · Answer

@Shane H.

Using your dad's IRA to lend funds to an LLC where he is the co-owner with you would not be allowed. Both of you are considered to be a disqualified persons to his IRA, more on this here:

https://www.biggerpockets.com/blogs/2810/47960-dis...

He does not need to take out a distributions and get taxed on that. His IRA can buy the property directly without the involvement of the LLC or either of you. The purchase of the property can be financed, but the loan must be non-recourse (conventional financing will not be allowed because IRA is the buyer).

You don't need to have a custodian who is local, what's more important when selecting a custodian is their expertise, customer service, fees, etc. Ask for recommendations from other investors and interview few.

Shane H. · Answer

@Dmitriy Fomichenko @Mark Nolan Account Closed

Thanks for the responses!  I was kind of figuring the LLC we have set up would be out, but had not run across a scenario like that being discussed online or on here...may have not looked deep enough....but thanks for the clarification.

Mark - interesting that you can do business with a brother/sisters IRA, I was thinking when they said direct family or whatever term the IRS used, Brothers/Sisters/Aunts/Uncles would be out.  My aunt/uncle are a possibility if I want to look for private money however I frankly hate owing family money, never really have owed any of them anything and have seen too many negatives of family/friends owing each other and it going south, dont even want to go down that path.

Think I'll stick to relationships with banks.

That being said will throw the idea of the IRA buying a property in cash, though he may not want to outlay that much cash and I could manage it and just take a management fee - dont think he's completely sold yet on using that much cash ($100-160k or so for a house) even though I've showed him the numbers and he'd net significantly higher returns vs having it in a crappy mutual fund.  Hoping he's coming around to doing a bit more financial planning now that retirement is knocking at his door.  We've had more discussions on it lately than in a long time.

Thanks again for the input.

Andrew Grieb · Answer

Equity Trust is who we use because they are the oldest or one of the oldest custodians and are pretty conservative.  They do not allow checkbook control.  We have a duplex in our IRAs and we prefer to invest by writing notes to other investors with liens on the property for the IRA.  That is much simpler than the ownership of the property in the IRA.  Go directly to the IRS website to see the guidelines on ERISA approved investments and prohibited transactions.

Chad Thomas · Answer

@Shane H.

This is a complicated instrument in which I would recommend professional assistance with. I have been going through the process myself to set up a fund to receive rollover contributions without penalizing the investor. To do it right, it needs to be set up in the correct manner from the beginning. There are several custodians you can work with and there are several types of fees( I've been quoted anywhere from $1,500-$4,995) to go along with them and reoccurring costs to keep to keep these funds compliant. I would be more than happy to have an in depth conversation regarding utilizing this form of funding. Happy Hunting! 😉

SDIRA custodians in KS? Also quick ? on the rules of lending?

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