FSBO a leveraged SFH in SDIRA?

Question

This was my first property in Baytown, TX which I bought using funds in SD-IRA and took a non-recourse loan on it as well. Its rented out for $1400 (lease was renewed for another year in March), professionally managed and currently worth $155k. Is it okay to sell the property myself which belongs in a SDIRA?

Rajeev Kotyan · Answer

@Avi Garg: You can sell all you want, just cannot get paid for it either directly or indirectly... so long as you are doing what would be classified as administrative tasks (i.e. not attempting to replicate what a professional RE broker or agent would do), you would be within the confines of the regulations

Brian Eastman · Answer

@Avi Garg

Yes, as the IRA account holder, you can direct the sale of the property.  If the SDIRA is with a custodian, they will sign the papers and can help you with understanding how to provide them with what they need.

If you have a Checkbook IRA LLC, then you as the manager of the LLC can execute the contracts.

This would not be the case if you are a licensed realtor in the state of Texas, however.  The issue is that as the IRA account holder, you can handle the acquisition and disposition of plan held assets.  You cannot, however, provide benefit to the plan.  As a non-licensed person, you are just selling.  As a licensed realtor, you bring a lot more to the table such as licensing and insurance and that could be considered a benefit.

You should also be aware of the implications of UDFI taxation on the gain from the sale relative to the portion that is still debt-financed.  Check with your CPA to be sure you understand this component of the transaction.

Dmitriy Fomichenko · Answer

@Avi Garg

you may want to look at utilizing 1031 exchange strategy to exchange your first property for another in order to shelter the taxes that would otherwise be due because of the debt-financing.

Mark Nolan · Answer

@Avi Garg

Your understanding is correct.

However, if you are self-employed on the side such as being an Uber driver that would most likely qualify you. In other words, full-time employment is not necessary.

Avi Garg · Answer

@Mark Nolan .. Thanks for the advice. Would a LLC for buy and hold investing qualify for solo 401k? My guess is its not since its passive investing rather than self-employment. Correct me if I am wrong.

Mark Nolan · Answer

@Avi Garg

You may want to look into the solo 401(k) (i.e.,g transferring the IRA to the solo 401k plan) if you want to utilize nonrecourse loans when investing in real estate as UBIT generally does not apply to the solo 401(k) plan.

Following are the similarities and differences between the solo 401k and the self-directed IRA.

The Self-Directed IRA and Solo 401k Similarities

• Both were created by congress for individuals to save for retirement;
• Both may be invested in alternative investments such as real estate,  precious metals tax liens, promissory notes, private company shares,  and stocks and mutual funds, to name a few;
• Both allow for Roth contributions;
• Both are subject to prohibited transaction rules;
• Both are subject to federal taxes at time of distribution;
• Both allow for checkbook control for placing alternative investments;
• Both may be invested in annuities;
• Both are protected from creditors;
• Both allow for nondeductible contributions;
• Both are prohibited from investing in assets listed under I.R.C. 408(m); and

The Self-Directed IRA and Solo 401k Differences

• In order to open a solo 401k, self-employment, whether on a part-time or full-time basis, is required;
• To open a self-directed IRA, self-employment income is not required;
• In order to gain IRA checkbook control over the self-directed IRA funds, a limited liability company (IRA LLC) must be utilized;
• The solo 401k allows for checkbook control from the onset;
• The solo 401k allows for personal loan known as a solo 401k loan;
• It is prohibited to borrow from your IRA;
• The Solo 401k may be invested in life insurance;
• The self-directed IRA may not be invested in life insurance;
• The solo 401k allow for high contribution amounts (for 2015; the  solo 401k contribution limit is $53,000, whereas the self-directed IRA  contribution limit is $5,500);
• The solo 401k business owner can serve as trustee of the solo 401k;
• The self-directed IRA participant/owner may not serve as trustee or  custodian of her IRA; instead, a trust company or bank institution is  required;
• When distributions commence from the solo 401k a mandatory 20% of  federal taxes must be withheld from each distribution and submitted  electronically to the IRS by the 15th of the month following the date of  each distribution;
• Rollovers and/or transfers from IRAs or qualified plans (e.g.,  former employer 401k) to a solo 401k are not reported on Form 5498, but  rather on Form 5500-EZ, but only if the air market value of the solo  401k exceeds $250K as of the end of the plan year (generally 12/31);
• When funds are rolled over or transferred from an IRA or 401k to a  self-directed IRA, the amount deposited into the self-directed IRA is  reported on Form 5498 by the receiving self-directed IRA custodian by  May of the year following the rollover/transfer.
• Rollovers (provided the 60 day rollover window is satisfied) from an  IRA to a Solo 401k or self-directed IRA are reported on lines 15a and  15b of Form 1040;
• Pre-tax IRA contributions on reported on line 32 of Form 1040;
• Pre-tax solo 401k contributions are reported on line 28 of Form 1040;
• Roth solo 401k funds are subject to RMDs;
• A Roth 401k may be transferred to a Roth IRA (Note that from a  planning perspective, it may be advantageous to transfer Roth Solo 401k  funds to a Roth IRA before turning age 70 ½ in order to escape the Roth  RMD requirement applicable to Roth 401k contributions including Roth  Solo 401k contributions and earnings.);
• Roth IRA funds are not subject to requirement minimum distributions (RMDs);
• The fair market value (FMV) of assets held in a self-directed IRA is reported on form 5498;
• The fair market value of assets held in a solo 401k are reported on Form 5500-EZ;
• At termination, the solo 401k is required to file a final Form 5500-EZ and 1099-R; and
• At termination, the self-directed IRA is only required to file a form 1099-R.

Avi Garg · Answer

Thanks for the quick replies @Brian Eastman and @Rajeev Kotyan ... I am not a RE agent so I guess it will be okay to sell it myself. Brian brings a good point on the UDFI. I didn't have to file for UDFI last year since I was under the threshold after taking all the expenses and depreciation but I just realized that this will get more complicated when I sell.

Guess now I need to find a CPA who is well versed with SDIRA

FSBO a leveraged SFH in SDIRA?

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