All Forum Posts by: Charles LeMaire

@Michael Plaks  - It seems we agree, but I may have to learn to say things more accurately.  Thanks for the clarifications.

@Michael Plaks - Thanks for the compliment (and the cooking lesson)... :)

For my clarification and perhaps others (there have been a couple vote, for what it worth), allow me to hit your point one by one.

#2. I am under the impression that the losses that are unlocked are from that property AND all property that year. Saw a suggestion to bunch repairs to take advantage of this. 

#3. When I say kick the taxes down the road, I view CS & BD as a mini 1031 in effect (not law).  My $100K investment is returned at a sale with $100K gain.  I invest $100K in a new investment, get $90K depreciation, so I pay tax on $10K.  The $90K gain shows when the second investment sells and the basis is not restored as the depreciation was already used.  Of course, I stay on the merry go round and do it again, but it works a lot easier with CS & BD.  It seems to have the same tax effect.

As an asside, as I passively invest in MF syndications, 1031 are technically possible, but unlikely.  I have seen two happen.  It is just hard to heard the investor (cats) in to the next deal.

#4. As I discussed this in my journey, it was explained that GPs who are in non-active rolls in a deal, will "aggregate" to enhance their RE Pro status.  But when this is done, it ties all there deals together, the effect of which is that at a sale of one, it is not consider complete disposition.  You know, everything on the internet is the truth...  

#5. Perhaps I am naïve, but CS & BD understandable, though I will admit it is the topic at meeting after meeting, so someone thinks it is hard. And I invest mostly in built buildings and know the new build rules are a bit different.  CS:  Dirt does not depreciate.  Take building, divide into property types (5 year, 15 year, and 27/39 year), then recalculate the depreciation.  BD: Pull all the 5 year & 15 year to day one.  Note CS must be done by engineers - there is a cost.  At this point in a syndication, the RE Pro are taking the resulting total off their income (of spouses income).  But we non-RE Pros have to sold something or it goes in the bucket for later. 

So Michael, smack me around, I think it is better for all to have a good understanding.

Regards,

@Sateesh Kumar - I'm a passive investor, not a CPA, so take with a grain of salt. First the IRS divides income & losses into three buckets: earned, portfolio, and passive.  Normally for a non RE Pro, these buckets do not mix.  There is a low income $3K rule; I find most syndication investors are above that.   But it has been my experience that passive gains unlock passive losses and that at the complete disposition of an asset, accumulated losses are available to the non RE Pro to be used against all income.  

So if you buy a property in the year you sell a property (especially when Bonus Depreciation is used) you get to use that passive loss against income, like the capital gains on the sold property, your W-2, or that conversion you are thinking about.  The benefit is that it can offset the income with the higher tax rate.  Realize this is kicking the can down the road; the basis of the purchased property goes down (and you get the associated depreciation), but when you sell that property,  the amount garnered will mostly be cap gain that you will need to pay tax on  -- or remain on the merry-go-round and buy another.  And there is a possibility that 100% B.D. will be restored. (I find this hard to believe as Pres Fair Share & Tax-the-Rich will have to sign it.  But who knows! )

The rule is in 26 US Code 469 paragraph G - but it is full of CPA speak.  Note RE Pros often aggregate properties to enhance getting to be an RE Pro.  This will obviate the complete disposition of an asset.  Also look for form 8582 in your taxes to see the aggregations of RE gains and losses.

Regards!

To be clear:

* This is 26 US 469 (g) - Disposition of Entire Interest in a property.

* It is not really the buckets, ie. passive, portfolio, & income.

This is such a confusing topic: IRA vs 401K and Trad vs Roth and your money.

All IRAs (Trad & Roth) are subject to UDFI. UDFI is triggered if the asset is sold with an outstanding mortgage (on previous year-end).  Buy a rent house and pay it off, UDFI is not a problem; there are other issues.  Invest in a syndication that holds for 5 years and sells with that mortgage, you have UDFI to deal with. There are disqualified persons with whom you can not do business. These do NOT get a step-up in basis.

Both Trad IRAs & Trad 401Ks were funded with pre-tax dollars but will ultimately be distributed (by you or your heirs) and those distributions will be taxed at income rates.  The timing of RMDs has changed, but they will happen! There are disqualified persons with whom you can not do business. These do NOT get a step-up in basis.

Both Roth IRAs and Roth 401Ks were funded with taxed dollars, but can be distributed tax free. The IRA is subject to UDFI, the 401K is not. Now neither have RMDs. Roth IRAs have two (maybe 3) 5 year rules to contend with. There are disqualified persons with whom you can not do business. One may not transfer Roth IRA funds to Solo-401K accounts.

Investing with Your Money is funded with taxed dollars, the gains are usually deferred and usually ultimately taxed at Cap Gain rates.  RE Pros get tremendous tax advantages.  Non RE Pros also get some advantages.  No disqualified persons. You have access to the funds/assets now. Assets in this group do get a step-up in basis.

In summary, it depends! A Roth Solo 401K might be the winner, but as I don't have a path to creating a large Roth 401K, my choice is Your Money. 

@Todd Goedeke - you are forgetting that you paid the tax to put it into the Roth.  YES, Tax Free is wonderful, but a Roth is just paying the tax on the seed and not the crop.  This is the same thing as that 30% pre-pay you are arguing against.  YES, avoid the penalty! But the tax will be paid one way or another.

Note: the Roth IRA is subject to UDFI, the Solo 401K is not. But one may not move Roth IRA money to a Solo 401K, so it is a bit of a dance.

Note: when RMD start (for the Trad 401K) they must come from that account, so one must plan to have funds available in that account - this is a bit easier in Wall St, than in RE.

@Todd Goedeke - 

(#1) I don't think I implied there were taxes on distributions from a Roth Solo401K (or Roth IRA), you already paid income tax on that bucket of money. Getting funds into a Roth Solo 401K is somewhat limited, for instance Roth IRAs can not be transferred.

(#2) One should not ignore the "tax dog", I assure you the compromises between tax deferred qualified accounts, RMDs, Medicare IRMAA, SS, etc is confusing.  With respect to the declining bonus depreciation, that isn't change, it was set-up with a fixed sun-set.  

(#3) WRT the tax now, rather than taxes later, don't let that tax tail wag the tax dog. Paying the penalty is the pain and should be avoided. But on Trad IRA/401K account, the tax will be paid now (tax rate on a small amount, which will grow) or later (tax rate on the large amount after it grew). This is the same math as the choice between Trad & Roth, the result is the same at a fixed tax rate - time is not really a factor. Note the tax rate are low now and will increase in 2026. If you have a lower FMV now, consider converting or distributing. One can do a 1031 on personally owned property, but not on property in a retirement fund.

My perspective is that of a serial LP investor in MR RE syndications. I used IRA funds one time and regretted it. Luckily I redirected most of my 401K would be contributions (match only) to non-qualified account then jumped into RE.

There are some parameters that need to be set. First, I assume anyone considering this will be wealthy in retirement, ie. your tax rates will not be low at that time. Second, ALL funds in traditional 401K/IRA funds will get taxed and paid by someone! Maybe your heirs, but there is no way around it - recall I assume you will not be sliding by with no income. Third, note that any RE done in a traditional qualified account (SD-IRA, Solo 401K, etc) takes all that wonderful Cap Gain income and turns it into earned income. Also if owned outside qualified accounts, that depreciation would defer income, in fact, if you consider a 1031 (available to direct owners, not so much to me in syndictions) you can keep exchanging and your heirs get a step-up in basis; the tax on the gain is never collected. Fourth, getting funds out of a 401K is a bit tricky; typically you have to quit, you might get an in-service distribution, other? Fifth, Roth vs Trad does make a difference.

As indicated above the tax will be paid, it falls out of the equations. $1M in a Trad IRA is really only $750K if your tax rate is 25% and you are already above your std deduc, etc. Do the math, pay taxes now on a small amount or pay taxes later on a larger amount, it really doesn't matter - this is very true when making the Roth Conversion decision and is pretty close on distributions.

The issue is the penalty! There are two ways around the penalty, but both take time. You can convert funds from an trad IRA to a Roth IRA, 5 years later the converted amount can be taken out penalty free. If you are say 50 or so, the 72T will allow you to take substantially equal amount out each year until 59.5. Note that if you are 55 in an 401K and leave work, you can access those funds.

I know folks that have pulled the trigger and just taken it all out.  I know folks that have borrowed from 401Ks.  Both groups have been happy they did.  But not I hang with successful RE folks.  If it blows up, you will not be happy!  The lesson here is to learn how it works and the risks before you jump into RE.

There are issues with using qualified funds in RE.  You must not comingle!  Both trad & Roth IRAs are subject to UDFI tax (surprise!).  Solo 401K is not.  

As mentioned above all trad accounts come out as income in the future.  Study the affects of future RMDs on your taxes and fees.  These will come back to bite you!  Look up Medicare's IRMAA, Social Security tax rates (no idea if you will see this, but it will likely be around is some form), and the Widow's Tax Trap, which will cause the remaining member of a couple to pay so much more in taxes.

My point here is that deferred income may seem nice now, but you will come to hate yourself when the taxes come due.

Regards!

@Li Ou - Your profile did not show where you are.  There are RE Meet-Ups in many locations, search to find ones near you.   Many of them will be SF, but you will likely find a few that are MF.  Attend, meet & greet, exchange contact information. 

I live in the DFW area, which is a hot-bed of MF.  Locally there are multiple Meet-Ups each week.  If you are in an less active area, listen for Zoom calls that are educational and often have Zoom break-outs.

In 2010, knowing nothing, I visited a mentorship group and it was well worth it to me to pay the money. This allowed me to meet a lot of GPs and LPs from all across the country.

Deals are out there!  I have received 100+ deal announcement this year so far, most of them are 506(b).

@Brian Plajer  - I find a lot of value (translation: ability to sleep at night) in the Sumrok network, because I get to meet, talk, and get to know the folks I invest with.  I prefer the Reg D 506 (b) model of knowing the GPs.