All Forum Posts by: Charles LeMaire

@Todd Goedeke   - The age for RMDs changed recently from 70.5 to 72.  I think it was the SECURE act.

I did not know that one could distribute in-kind, that makes the distribution easier.  But I pretty sure the taxes have to be paid in money, so one needs to not be RE rich and cash poor.

@Taylor L.  There may be several ways to skin that cat.  One has to distribute as an RMD a percentage of the total of ones IRAs, so if you keep funds in the market in any of your IRAs, you go there to make the distribution.  On the other hand, as I understand it, one has to distribute from each and every 401K.  If you have a Solo 401K sunk in R.E, that would be a problems.  

What follows is from the perspective of a more wealthy person.  If you are planning to be broke in retirement, no need to read.  But why would a broke person be on this site anyway...  And I apologize for hijacking the topic a bit.

For the youngsters that have never heard of RMD (Required Minimum Distributions), at 72 you are forced to take distributions from non-Roth IRAs and 401Ks. Each year the distribution is based on life expectancy; the first year is about 4% (3.8% I think). Say you were a good saver and have $1M in your Trad IRA. You are pulling $40K out at 72, adding that to about 85%* of your Social Security to make tabulate your income and the tax there on. Say you and your spouse both have $1M then you are distributing $80K, and this will likely increase as you age. A couple things can cause some pain. 1. If you are a great saver, when your income hits (this year's numbers) $176K, your Medicare costs increase $50 per person, per month. Look up IRMAA. 2. Note when one of you passes (Financial Planers always kill the guy off first), the remaining person inherits the IRA so will continue to get the full amount. The lower SS disappears. And the Standard Deduction decreases and the tax rates increase (married to single), so that you get a big surprise in your taxes from then on. Look up Widow Tax Trap.

Another thing to consider is that your RE and all owned assets get a step-up in basis (again, current admin aside!). IRAs do not. If you pass a non-Roth IRA to your kids, they get to pay the tax as they take it out over a 10 year period. Perhaps you don't care because you're DEAD, but perhaps you do.

If married, consider the idea of Roth Conversions; the distribution tax rate is arguably higher than you think it will be.

To add to @Taylor L. 's comment, the FMV is used to determine RMD amounts when you reach that age (you have to do the FMVs at all age!) and if you want to do a conversion, withdrawal, etc. And BTW, don't put yourself in the position that all of your IRA funds are tied up in R.E. It is very hard to saw off a room to make the RMD distribution! And that distribution is taxed, so again you need real money. Be careful as you approach age 72 and beyond so that you don't force a sale.

Above I think you indicated that this was an appreciation play! Note that appreciation in an IRA (non Roth) turns into income and is taxed as such. Whereas appreciation in a non IRA is Cap Gain and is taxed at a lower rate (current administration plans aside). You also loose the benefit of depreciation, that can offset any current profits (you sound as if there may be none, but dare to hope...). There is also the concept of RE Pro that allows Depreciation to offset Income (you will want to aggregate). And if that is not in the picture, you get similar benefits in the years you dispose of properties (do not aggregate). Putting tax advantaged investments in tax free accounts is a bit sub-optimum.

I looked through the above, but did not see UBIT/UDFI mentioned.   I think the largest problem with IRAs is that if you make much profit on a leveraged asset, you will owe a fairly hefty tax on the pro rated part of the deal.  

I know that a Solo-401K avoids this tax. Not sure about some of the other flavors mentioned above.  I strongly suggest you check.  

Probably a bit off topic, but I think GPs oversell two ways. 1. Using an IRA on a MF has issues; @Paul Moore Thank-you for mentioning the UDFI (UBIT's cousin). The tax can get non-trivial in a successful MF deal.   2. Cost-Seg & Bonus Depreciation is rarely beneficial for the first time MF passive investor.  

I meet a lot of folks kicking the MF tires: 1. I like to tell them the distributions are not "eatin" money, you'll occasionally go hungry.  2. The deals are non-liquid, there is no easy, cheap way out.  3. As a passive you get to say Yes or No to a deal, but you do not get to renegotiate it.  4. Study and learn how it works, don't just claim you're Sophisticated.  And if you are Accredited, also be Sophisticated.  

As a Passive, I don't want to work with a GP that doesn't screen his investors; It isn't good for the investor or the deal!

Regards.

Hey @Greg Moran, It is usually the UDFI that gets R.E investors as there is a mortgage. If it is a buy and hold, you just pay down the mortgage to avoid any extra. If it is not a large investment, the exemptions may save you. If it is bigger and a short hold (3 to 5 yrs), look into a Solo-401K. There is also a Blocker LLC option. Good Luck.

Yeah, folks are laughing at TX's electric issues, I guess we deserve it. It was cold on the Sun 14th, lost power overnight, noticed it at 4am. Moved to a series of hotels thinking it would clear.  Power out Monday (15th), Tuesday (16th), back up Wednesday (17th).  But water frozen.  We enjoyed a hotel until Friday (19th), returning that day.  The weather changes in TX; we stayed above freezing all night Sat (20th), not a speck of snow left!

We got to -3, which I believe is the lowest in all of recorded history.  In 40 years, I don't recall lower than +10.  So I can't fault failure when we go that far below the expected range.  We don't build our houses to handle that kind of weather!  We don't even require tornado shelter!

I also really like the book!  I have been recommending it to folks as I talk to them.  As do your answers and comments here on BP, Brian Burke's Hands-Off Investor also give great details of how it works and what to look for.   The explanations of the math behind the various syndication waterfall structures was very nice.

What are Passive Rental Losses and how do I use them?!?

Links on BP are clearly not my friend!

Maybe this will work.

Charles

Hey!

Disclosures: Not a CPA or Attorney!  I am a passive in many deals, so this is important to me.  I initially misunderstood how this worked, and apologize for any prior erroneous posts. I've felt that a lot of Deal Sponsors tend to mislead potential passive investors, especially first time investors.  Found the following explanation:

What are Passive Rental Losses and how do I use them?!?     --    Real Estate Tax Strategist  --  Jan 6, 2020

Essentially, for a passive investor, when a property is sold the gains release all the depreciation on that property and any depreciation in other properties for that year.  

Regards,

Charles

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@Greg Moran -- UBIT/UDFI: Are you investing with an IRA? Does the property have a mortgage? Will the property be sold before the mortgage is paid off? If YES to all, I think you and UDFI will become acquainted in the future. Be aware... Good Luck with the deal!