All Forum Posts by: Catherine Wynne

Rather than giving up the depreciation tax advantage, you are trading it for a different tax advantage when you invest in real estate with an SDIRA or SD401k

Real estate purchased in a retirement account carries its own significant tax advantage. For instance, money in a Traditional IRA has already been 100% deducted at the time of contribution, thus there is no basis left for an individual to deduct. Money made in a Roth IRA, though not deducted when contributed,
is tax free for the future. In either case, the tax advantage of the account makes it unnecessary to depreciate the property over 27 years or more.

Comparing post tax money in your pocket to pre-tax or tax-deferred money in your retirement plan is not comparing apples to apples. In some cases, because the money has already been contributed to the account, the investor is comparing the ramifications of distribution first and then investing versus no immediate tax or penalty and creating the greatest returns on those already-contributed funds. Since the tax advantaged money in the plan is, in effect, not
yours until you take it out of the plan, the real goal is your overall investing and tax strategy for your lifetime.

One of the things we're trying to get through to people is that a. you can lend from your ira, b. you don't need an LLC to do it, and c. it's another way to get involved in real estate investment.

When we go to real estate netowrking events, there are often people who stand up during the "wants & needs" section of the event and say they have IRA funds that they want to lend.

I think that if you want to find IRA lenders for real estate projects, you can be the source for that information at these events and more. Educate yourself, get out there and see what sticks.

Peter Kim

Like Steven said, you can partner with your retirement plan, as long as you maintain clear, IRS-compliant bookkeeping and you don't commit any prohibited transactions.

Some common prohibited transactions when someone partners with his retirement plan:

1. Putting sweat equity or personal funds into the property. This is prohibited by the IRS.

2. Making payments or accepting revenue outside of the percentage of ownership. (For instance, if you own 50% and your IRA owns 50% of a property, you must split all profits and all expenses 50% for the life of the arrangement.)

3. You cannot use personal assets to secure a loan for the property.

It's tricky, but a good financial advisor or self-directed IRA administrator can help you navigate through a partnership with your retirement plan.

Robert--

Your mother-in-law will need a couple people to help her invest her IRA in real estate. She'll need someone who knows real estate, an IRA provider that services self-directed IRAs and, potentially, a financial advisor.

Depending on her experience, the real estate professional and the financial advisor can play a large or small role in the process. However, she will need an IRA provider that can ensure the transactions and ownership of the IRA's real estate is in compliance with IRS regulations.

She'll notice that not all IRA providers offer alternative investments like real estate. Too, not all providers that offer alternative investments have the same level of customer support. Performing due diligence on the self-directed IRA provider is as important as performing due diligence on the real estate investment itself.

In short, the best thing for her to do is to contact these professionals and a knowledgable self-directed IRA provider so they can answer questions specific to her situation.

If she has any specific questions about the process, I'd be happy to answer them on this forum.

Let me clear up a few things. (Full disclosure:) I'm president of New Direction IRA, a self-directed IRA provider.

First, you can invest your SIMPLE in real estate. People choose to use Roths, 401Ks, etc. for different reasons, but any IRA can be self-directed.

Second, this means you don't need a Checkbook IRA or Checkbook LLC. For instance, our company handles all the administration, compliance and bookkeeping work for your investments so you don't need to constantly deal with that as you would in a Checkbook IRA. If the IRS suspects wrongdoing and audits you, you need to have a clean paper trail--that responsibility is solely on you in a Checkbook IRA structure.

Additionally, you can only fund your IRA-owned LLC once. That means you need to put enough cash in there for every investment that LLC will purchase for your IRA. With a SIMPLE IRA invested directly in real estate, you direct the self-directed IRA provider when you need something funded.. (purchases, repairs, etc.). Although the Checkbook structure may take slightly less time, our company (again for instance) uses an online client portal so funds are sent quickly.

Also note that Checkbook IRA structures can be as or more expensive than other self-directed IRA structures. (For instance, our company does not charge per check if the request is made online).

And I hope it doesn't seem like I'm beating up on Checkbook IRAs--in fact, we offer them--it's just you need to be extremely diligent and plan everything out regarding your investment if you choose this structure.

One note about UBIT: it is assessed on the debt leveraged portion of your asset. So if you take a loan from a bank to partner with your IRA, the profits will be assessed UBIT, factoring in the percentage that was debt leveraged. It's not a penalty.

And lastly, you can't put sweat equity into the property nor live in it. That said, the IRS does not discourage fix & flips--it's a very common strategy amongst IRA investors.

It's true that your IRA can partner with another person, entity, or IRA. In partnering as tenants-in-common, the IRA would own an undivided percentage of the property and the remaining portion would be owned by the other person/entity/IRA. You may partner your IRA with personal funds and/or disqualified persons, but some restrictions apply.

One major restriction is when your IRA partners with disqualified persons, the ownership percentage must be kept constant throughout the life of the investment, and all expenses and income must be split according to that ratio. Each bill must be paid according to the ownership ratio.

For instance, if you and your IRA each purchase half a real estate asset (i.e. are tenants-in-common on the deed), any renovation or fix-up costs must also be split in half. Conversely, any income from the property must also be split in half (half to the IRA and half to the other owner).

You don't need to use an LLC when partnering with your IRA to purchase real estate. You can choose to do that, but the IRS does not require an LLC or other entity to partner funds.