All Forum Posts by: Bernard Reisz

Stephanie, an additional tax concept to be aware of is the Step Transaction Doctrine, which says that intervening steps layered into a transaction to circumvent tax rules are disregarded. So in your case, the intervening step of funds flowing through aunt's RE company could be disregarded and the transaction would be viewed as being between the IRA and the mortgagor.

@Kenneth Johnson Most employer sponsored 401k plans don't allow you to rollover the funds while employed, but once no longer employed you can certainly do so. Even while employed, the restriction on rollovers is imposed by the plan sponsor/administrator, not tax law.

401k funds can be rolled over to IRAs, another 401k (including a Solo 401k, if there's some form of self-employment income). Any of those can be implemented with checkbook control to provide a great RE investment vehicle.

@Randy Craven When utilizing a Solo 401(k) with checkbook-control you would be the plan trustee and the plan assets could held in a bank account from which you could invest without the involvement of a custodian. Qualified Plans, such as 401(k)s and profit-sharing plans don't need a qualified custodian (unlike an IRA, which requires a custodian and for which an LLC is used to achieve checkbook-control).

@Kin Lay There are custodians that offer self-directed IRA accounts with and without checkbook-control. Checkbook-control using an IRA-LLC would minimize the involvement of the custodian, keeping fees down and giving you complete control over the assets.

The freedom of checkbook control does require you to be more aware of some tax rules that affect IRAs.

@Bill Yozipovich Are you referring to a SEP-IRA or an index mutual fund that tracks the S&P 500? If referring to the latter, is the mutual fund an asset of a retirement account?

SEP-IRAs can be rolled-over to other IRAs. IRAs accept only cash contributions, not in-kind contributions of other assets.

@Sandy Sawyer There are several acronyms to look in to: UBIT (Unrelated Business Income Tax), UBTI (Unrelated Business Taxable Income), and UDFI (Unrelated Debt Financed Income).

Using an IRA is a great strategy for many, but not all, RE investments. For those investment for which using an IRA is the right approach, checkbook-control makes doing so easy and simple.

@David Espana As others have noted, the return is not aligned with the risk on this and the interest rate being offered could be had for a first-position loan. In addition, if the loan is "asset-reliant" you have to consider what you were to do if you foreclosed on it to collect. Could you complete the project?

Regarding the SDIRA, as has been pointed out, you should have sufficient liquidity available in it to cover unexpected costs. The administrative hassle could be overcome by getting "checkbook-control" of your SDIRA.  

@Dee Emeigh Are you taking a distribution from the IRA to finance this or will the IRA be an investor?

While using an IRA to invest in RE is a great idea, you've got to remain aware of some do's-and-don'ts. Some items in your post caught my intention: intention to fix the property yourself and the intent to rent to family. If being done from within the IRA there may be some tax pitfalls.

@Nam Tran I'm inclined to think that your reference to employer 401k was with regard to whether you should either contribute to get the tax-benefit and employer-match or not contribute and use the after-tax funds to invest in RE; early-withdrawal of previously contributed funds from an employer 401k would subject the withdrawals to 10% tax penalty in addition to income tax.

You may be able to have the best of both worlds, depending on your employer plan and your personal circumstances. If your employer plan allows for in-service withdrawals you could make non-taxable rollovers from that plan to a checkbook-control IRA or Solo 401k from which you could invest in RE. Feel free to PM me if you'd like more info.

@Angela Abe Using retirement funds to invest in real estate may be simpler than you think. It can be done through either an IRA or 401k plan. 401k approach has the benefit of not incurring UDFI (Unrelated Debt Financed Income) on nonrecourse financing used for real-estate investment.

Either route, IRA or Solo 401k, can be easily administered with checkbook-control, meaning the retirement funds are accessible within a checking account. There are some tax rules you have to be conscious of given the freedom of checkbook-control. If you'd like to know more, just send me a message.