All Forum Posts by: Brett Synicky

Quote from @Nick Am:

@Brett Synicky

Answers and thoughts below in Bold

--> I am trying to setup a management company (LLC-B) and charge LLC-A management fees. This active income can help me fund my retirement as well as help me get reimbursement for home office and health care premium while lower my tax liability. Agreed but Sole Prop will accomplish this without all the hoops you're talking about.

--> This is my plan. I have two properties which at 10% fee will be around $35K. If I leave this amount in Sch-E, I get taxed at ordinary income tax rate at Federal and State level, which along with my regular W2 income can be substantial. Assume for a moment its close to max tax bracket ie. nearly 49% (Federal + State), roughly $17K. Can you swing REPS to offset? Will that help?

Now if I pass that income as management fees to S-corp, I pay $3.5K (SE tax) + $800 (LLC fee) + $1700 (CPA + bookkeeping) = $6K in total. Just don't see the S-Corp or another LLC having a place here..I've heard tax advisors say it takes around $70k min of self employment income for the break even point for S-Corp to make sense. That could be just federally, however...

Against $35K income:

1) I take $23,500 W2 which 100% goes into Solo 401K --> No income tax You have to account for taxes like FICA and Medicare so this will be closer to $25-$26k. If you adopt a solo 401k as a Sole Prop you won't have to run payroll and incur payroll taxes and you can still do $23,500 plus 20% of the profit as a profit sharing contribution. BTW you said you have a 9-5 so keep in mind you cannot double dip on the employee 401k contribution. If you're maxing that out at your 9-5 then you'll only be able to contribute profit sharing in the Solo 401k. If you're contributing less than the $23,500 then the difference can be put into the Solo 401k plus the profit sharing. Hope all that makes sense. 

2) LLC-B contributes $5875 towards retirement --> tax deduction what type of contribution is this?

3) Remaining $5625 is reimbursed to me as home office expense.

Where is the income tax of 49% here? How is this juice not worth the squeeze? $6K in taxes and expense vs $17K in Federal and State taxes.

Ok so after all this, book a consultation with a tax advisor. DM me if you want a referral. 

 @Nick Am:

Since you're only going to manage your own rentals the S-corp/LLC is likely overkill. Why not just set up sole prop? I doubt 10% of the GRM will equal enough to where an S filing status makes sense.

The home office and such is nominal so that alone isn’t worth doing this. Many people who own rentals and are already self managing them will set up a pm biz to be able to adopt a Solo 401k. Since the contributions have to come from the business income (PM biz) it's not likely you'll come close to taking advantage of the high contribution limits of a Solo 401k. It will allow you to roll existing retirement funds into the 401k (save Roth IRA) and self direct those funds.

You listed some of the benefits but you didn’t explain what you’re specifically trying to accomplish. Let’s hear from some of the CPA’s in the group like @Michael Plaks or @Ashish Acharya. 

Quote from @Abe Linc:

How to use 401K?

$200,000 in 401K, rental mortgage payoff is $130,000. Rental gives $500 monthly income from $2,000 rent. Should I use 401K to payoff mortgage and have that $2,000 as income OR take 4% of that 401K (only 8K) as income and keep the mortgage? 

 Are you over 59.5? Unless it’s Roth and you have that much principal you can withdraw without tax and penalty then I would not do this. 

Quote from @Larry Bailey:

Hello!

I am 59 years old, and my retirement fund is all in my 401k. I want to diversify and I feel like the best way to accomplish that is through real estate. I am currently trying to learn as much as possible by reading books and listening to podcasts. (The Black Friday sale on the Bigger Pockets bookstore was where I did my own Christmas shopping so my family knew what to ‘buy’ for me!). My only regret is that I never considered real estate decades ago, but I look forward to this journey and the impact it will have on my family. 

 Larry welcome. There are lots of helpful people in this forum and LOTS of posts to scour. Reach out anytime. 

Quote from @Matt Agnew:

1. If you had $50K in a Self direct IRA how would you leverage that to yield short and long term dividends?

2. Do you know of any HML are non recourse in San Antonio?

Thanks!

This is more than enough to do PML's whether you originate or purchase from a broker is up to you. The returns will likely be greater if you source the borrower and originate on behalf of the IRA. Hopefully you have a Checkbook IRA to avoid the red tape and fees of going through the custodian for each transaction. But IRS allows an IRA to be invested in anything except life insurance and collectibles. Probably not enough the IRA to own real estate given reserves needed and such. So brainstorm the different options then pull the trigger! Incidentally here's a list of non-recourse lenders you can talk to. Don't limit yourself to the San Antonio area, you may not find one! 

@Otis Clayton nope. This is an example of private lending which is different than the IRA owning real estate and does not trigger UDFI/UBIT tax.

This is a very common way for people to investing using their retirement accounts. Often people overthink this. Consider doing this personally or using an LLC. It's the same thing except it's done in the name of the IRA and all the money comes out of the IRA and returns go back into the IRA.

Incidentally this is the perfect scenario where a checkbook IRA is going to be far superior to having to go through the custodian for every transaction. 

https://www.biggerpockets.com/member-blogs/2810/21298-solo-4...Quote from @Ken M.:

Quote from @Brett Synicky:

@Ken M. That's not how it works. UBIT is generated two ways. Income from leveraged real estate or active business income. It's a sliding scale but at about $12,500 of income for the year it scales up to 37%. But that is calculated after expenses and depreciation is factored in. 

Retirement accounts are designed to be invested passively so when the IRS sees you running an active business in it, to level the playing field between retirement accounts and other business the retirement account incurs UBIT. 

When the IRA invests in real estate using debt not only does it have to be non-recourse but the IRS says, you can use leverage but since you aren't only using IRA money for this investment the retirement account is going to pay UBIT on the income generated because of the debt.

There's more nuance to to it for sure but this is a good overview. Make sense? 

Sort of. When I looked into IRA accounts, I found that it didn't do service to my situation. Thanks.

Happy to help clarify if you’d like. DM me. 

Another thing to note is that if you’re self employed with no full time W2 outside yourself and a spouse a solo 401k is exempt from UBIT on leveraged real estate.  

@Ken M. That's not how it works. UBIT is generated two ways. Income from leveraged real estate or active business income. It's a sliding scale but at about $12,500 of income for the year it scales up to 37%. But that is calculated after expenses and depreciation is factored in. 

Retirement accounts are designed to be invested passively so when the IRS sees you running an active business in it, to level the playing field between retirement accounts and other business the retirement account incurs UBIT. 

When the IRA invests in real estate using debt not only does it have to be non-recourse but the IRS says, you can use leverage but since you aren't only using IRA money for this investment the retirement account is going to pay UBIT on the income generated because of the debt.

There's more nuance to to it for sure but this is a good overview. Make sense? 

Quote from @Otis Clayton:

In my search for private money , I have heard there people use SDIRAs to fund real estate investments and be in the first position.

I wanted to know what are the pros and cons of using SDIRAs for fund Real estate?

Lots of people use checkbook SDIRA for private lending. In fact because an IRA kicks off UBIT on leveraged real estate many people opt for private lending until the account has enough to buy real estate in cash if that is their goal. 
If you’re just looking for money to fund deals and you’re thinking the source could be IRA money then it shouldn’t make too much a difference to you whether the investor uses their personal funds or IRA funds. Only caution is if they don’t have checkbook control and there’s a time crunch going through the custodian can cause delays and red tape to deal with.  

Quote from @Daniel Saravia:

anybody here had bought real estate using self directed IRA? is so what lender did you use that provide non recourse loan? thank you in advance!

Here’s a list of non-recourse lenders you can look through.