ROBS or SDIRA - 20 year plan?

Question

Trying to figure out a 20 year plan to use a ROBS or SDIRA to invest and hold RE. My ROBS/C Corp just sold a franchise. Now I have capital to invest. Here's what I've learned lately. Again - trying to think about a 20 year plan...

ROBS/C-Corp - double taxation, no step up basis, model relies on moderate future tax rates, cost of capital and 1031 BUT - the C Corp CAN obtain financing - should I just buy a property a year, cash out REFI, 1031, plan on only pulling cash out when we need it?

vs

SDIRA - no self dealing/more restrictive in my participation, more favorable tax structure BUT - the SDIRA CANNOT obtain financing, I'd need seller fin or just pay cash. Lose out on leverage.

Are there any cases where people just accumulate property over 15-20 years in a C Corp? How do they exit, or is it just a bag of flaming taxes at some point?

Brian Eastman · Answer

@JD Klein

As I said, speak to your ROBS provider and probably your CPA as well. I'm touching on the top level, and there are a whole lot of fairly complex layers to what you are trying to address.

Your outline is what I would refer to as "wedging" a solution into your structure as opposed to using the structure for its intended purpose.

I do not know anyone who holds rentals in a C Corp. I also don't know anyone who hunts squirrel with a bazooka, or who paints a house with an artist's brush. You simply don't use a tool that is that poorly suited to the job at hand.

There are several lenders who will do smaller non-recourse loans to an IRA.

Dmitriy Fomichenko · Answer

And I agree with Brian, using C Corp. for rentals is not the right strategy.

Dmitriy Fomichenko · Answer

@JD Klein

Here is a list of lenders offering non-recourse loans to retirement accounts:

https://www.biggerpockets.com/...

Some of them will lend as little as $25K.

JD Klein · Answer

HI Brian thanks for responding. I should have qualified my statement. I was told by a lender that I can get non-recourse to an SDIRA but min loan amount is 1 million. So maybe I need to think bigger. But still the activity limitations.

on the ROBS piece, my value add would be managing improvements and property mgmt.

Do you know anyone who just rolls up a bunch of income property in a C Corp and how do they exit

Brian Eastman · Answer

@JD Klein

Speak to your ROBS provider, but generally the structure is not well suited to passive holdings such as rental property. There needs to be the earned income component of the C-Corp to justify the existence of the 401(k) and your ability as a compensated employee to participate in the plan. There could be some ways you could "wedge" passive rentals into such a structure and remain compliant, but it would be about the least effective way to hold rental property from a tax perspective even if you could.

A SDIRA will require you to be arm's length. Your assumption that leverage is not available to an IRA is incorrect. An IRA (or Solo 401(k) if you might qualify after shedding the ROBS structure) can use non-recourse mortgage financing. Such financing is limited a bit with respect to LTV, and does potentially create a small amount of tax on the leveraged component of income flowing to the IRA, but an IRA can definitely leverage and see a real boost in return as a result.

ROBS or SDIRA - 20 year plan?

ROBS or SDIRA - 20 year plan?

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