Syndication using SDIRA $

[Brad Herb]

I have an opportunity to invest in a syndication. Initially I was planning to withdraw Roth IRA $ to invest. However, the sponsor said there is an option to invest in the syndication with a SDIRA. I am interested to know the advantages and disadvantages of using a SDIRA. Do the tax advantages outweigh the SDIRA related fees (ie setup, custodian, transaction, asset specific, administrative)? I appreciate any input. thanks!

[Michael Plaks]

Quote from @Brad Herb:

I have an opportunity to invest in a syndication. Initially I was planning to withdraw Roth IRA $ to invest. However, the sponsor said there is an option to invest in the syndication with a SDIRA. I am interested to know the advantages and disadvantages of using a SDIRA. Do the tax advantages outweigh the SDIRA related fees (ie setup, custodian, transaction, asset specific, administrative)? I appreciate any input. thanks!

What is your goal? Money for today or money for retirement?

If you have your current needs covered and are investing for the long future, i.e. retirement - then Roth IRA is absolutely the way to go. You will avoid all taxes on the profits from this syndications.

[Kaaren Hall]

Brad: Syndications are the #1 asset class for SDIRAs. Each offering is different, so your answer starts with a good look at the numbers. The account fees are minimal compared to the potential gain with most syndication offerings. One thing to watch out for... it is a tax, but not an income tax (so it applies to Roth accounts as well). That is called UDFI. Unrelated Debt Financed Income Tax. Ask the asset sponsor if they have debt in their capital stack. If so, your IRA will most likely need to file a 990t tax return annually and pay this tax. You can read more about it at www.IRS.gov Pub 598.  When your tax professional calculates your UDFI tax, you can obtain information from the asset sponsor for potential write-offs.  Often syndicators will do a Cost Segregation, and this can minimize UDFI tax.  Happy to discuss this with you further. 

[Brett Synicky]

Quote from @Brad Herb:

I have an opportunity to invest in a syndication. Initially I was planning to withdraw Roth IRA $ to invest. However, the sponsor said there is an option to invest in the syndication with a SDIRA. I am interested to know the advantages and disadvantages of using a SDIRA. Do the tax advantages outweigh the SDIRA related fees (ie setup, custodian, transaction, asset specific, administrative)? I appreciate any input. thanks!

While an SDIRA will have UBIT on leveraged real estate, a solo 401k is exempt from UDFI (unrelated debt finance income) generated UBIT. If you’re self employed (or can be) with no full time w-2 employees outside of you and a spouse you should consider the solo 401k instead if SDIRA. It has Roth component and traditional built in.  Only downside is Roth IRA cannot roll into a 401k.  

Furthermore, you should explore checkbook control versus having the custodian make all the investments.  Hope this helps. 

[Kaaren Hall]

A Solo(lk) is not always exempt from UDFI Tax. Additionally, you could not move your Roth IRA funds into a Solo(k) because for some reason unknown to even the Department of Treasury (I asked them) Roth IRAs cannot transfer into the Roth bucket of a Solo 401(k).

[Jonathan Bock]

@Brad Herb

Is it really an opportunity ? I love the sage advice of @Michael Plaks "What is your goal ?"

[Brad Herb]

Quote from @Michael Plaks:

Quote from @Brad Herb:

I have an opportunity to invest in a syndication. Initially I was planning to withdraw Roth IRA $ to invest. However, the sponsor said there is an option to invest in the syndication with a SDIRA. I am interested to know the advantages and disadvantages of using a SDIRA. Do the tax advantages outweigh the SDIRA related fees (ie setup, custodian, transaction, asset specific, administrative)? I appreciate any input. thanks!

What is your goal? Money for today or money for retirement?

If you have your current needs covered and are investing for the long future, i.e. retirement - then Roth IRA is absolutely the way to go. You will avoid all taxes on the profits from this syndications.

Thanks Michael. I'm investing for the long haul.

[Costin I.]

@Brad Herb - one thing to watch when investing in a syndication with an SDIRA is the highly trumpeted ROI in early years via a cost segregation study and the accelerated depreciation it creates...which you'll not be able to take advantage of via a SDIRA.
The same is true for a house—placing a tax-advantaged asset into a tax-advantaged investing account cancels the tax advantages (or many of the immediate ones).
Maybe @Michael Plaks or @Kaaren Hall can explain this better or correct my understanding here?

[Kaaren Hall]

@Brad Herb Costin makes a point about Cost Segregation accelerating depreciation.  You will be able to take advantage of it in a SDIRA if the syndication also has taken on debt and therefore passes UDFI on to your account.  When your tax professional prepares your 990t they will utilize the Cost Seg to minimize the UDFI tax.  Discuss this with your competent tax professional.  I use @Amanda Han of Keystone CPA.

[Chris Seveney]

Quote from @Brad Herb:

I have an opportunity to invest in a syndication. Initially I was planning to withdraw Roth IRA $ to invest. However, the sponsor said there is an option to invest in the syndication with a SDIRA. I am interested to know the advantages and disadvantages of using a SDIRA. Do the tax advantages outweigh the SDIRA related fees (ie setup, custodian, transaction, asset specific, administrative)? I appreciate any input. thanks!

 What type of syndication are you considering investing in? 

I would not withdraw from the IRA personally because of tax ramifications, but also is the syndication the best use of SDIRA funds?

[Brad Herb]

This syndication is for the site construction of a 400+ residential subdivision consisting of TH's and S.F. units. A national builder is under contract to purchase all the finished lots to construct the units. The hold time is 1-4 years but expected to be done in 3 yrs. Quarterly dividends will be paid out beginning in Mar 2025 which will treated as capital gain income. The first phase or about half the lots will be short term gains with the possibility that the second phase may qualify as long term gains. The sponsor said the syndication is similar to a Lending Fund. Next week the full offering docs will be made available to review. 

[Ashish Acharya]

@Brad Herb Investing in a syndication via a Self-Directed IRA (SDIRA) offers tax advantages but comes with fees and limitations:

Advantages:

1. Tax Benefits: Gains grow tax-deferred (Traditional SDIRA) or tax-free (Roth SDIRA).
2. Avoid Penalties: Keeps funds in the IRA, avoiding early withdrawal penalties.
3. Diversification: Adds real estate syndications to your retirement portfolio.

Disadvantages:

1. Fees: Setup, custodian, and administrative fees can reduce returns.
2. UBIT: If the syndication uses debt, income may be subject to Unrelated Business Income Tax (UBIT).
3. Complexity: Strict rules; all income/expenses must flow through the SDIRA.
4. Illiquidity: Syndications are long-term, locking up funds.

Use an SDIRA if the investment is significant and the UBIT impact is minimal, especially with a Roth SDIRA for tax-free growth.

Remember that RE, outside of retirement accounts, provides the biggest tax benefits.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.