All Forum Posts by: David Mcginnis

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I'm thinking about investing in some leveraged syndications in my SDIRA. The deals typically take full advantage of bonus depreciation, so my basis is substantially reduced during the first year. I'm not concerned with taxes on operating cash flows, as I expect to see very little taxable cash flow. But on sale there is the possibility of a substantial gain, subject to UDFI. Because of my low basis, I am concerned that the debt ratio will be quite high, resulting in the majority of the profit being taxable inside the IRA. Much of that gain will be applied to bonus recapture, but the pure capital gain part will be subject to UDFI at cap gains rates, based on the debt ratio. Seems like my basis should be adjusted upward before the "average basis" is calculated as part of the debt ratio calculation, but I can't tell how that calculation is actually done. Any insights on the impact of bonus depreciation and recapture on the debt ratio and udfi calculation? If you are going to tell me not to worry because IRAs are not taxed, don't bother to respond.

Thank you. I’ve been searching the Web for more detailed info on this topic and finding only scraps. Trying to pull together a more comprehensive understanding. I’m not surprised syndicators don’t know about it based on the very limited info I can find. A good cpa could clear this up, but I’m actually skeptical that my cpa and probably many others understands it and I don’t want to pay them to get educated. In the meantime I’m struggling to get my syndication sponsors to admit they can report straight line depreciation. 

Brian
thanks for your comments. A couple of follow up questions:

1) I understand that straight line depreciation must be used for IRAs, but in talking with several syndicator they seem to know nothing about that, and instead indicate that they use accelerated/bonus depreciation. For one thing, I think that’s wrong, and for another I think that’s bad because that extra depreciation increases the debt ratio and causes more tax. Thoughts? 

2) when depreciation is recaptured upon sale, I think that recapture is probably added back to basis, effectively nullifying the earlier impact on the debt ratio. Do I have that right? 

If my SIDRA (regular/untaxed contributions) pays UDFI tax, what happens to distributions from the IRA? Do I have to pay tax on that income again or do I now have basis in the IRA?

Also, I think I understand that bonus depreciation is not used for IRA tax calculations, and straight line depreciation is used instead. Do I have that right? Seems that matters a lot in a syndicated leveraged investment, because a low basis results in a high debt ratio, and can make most of the profits taxable. Also, I think there is a real possibility of taxable operating profit in the early years of a syndicated leveraged multi-family investment as compared to outside of an IRA you get substantial shelter from bonus depreciation. Does that seem right?

Also wondering if IRA's facing UDFI have to pay the ObamaCare surchage of 3.8% in addition to ordinary income tax, cap gains tax, and recapture tax?

I know I need to rely on professional tax advice. Just trying to get a basic understanding so I am in position to evaluate the advice of my CPA.

@Wes S. I believe it’s occupancy that drives up cost. Consider an owner/occupant that’s sells to an investor and then rents the house back and continues to occupy. Nothing changes with supply and demand. Instead, if he rents somewhere else and a new tenant moves to the home he just vacated, again no change in supply and demand. Same number of houses available and same number of occupants. If an investor buys a property to speculate on values (without installing a tenant) he removes some supply from the equation. But that’s pretty rare.

Recently looked at an occupied 3 unit building that was scheduled for foreclosure. Presumably, the tenants has posted security deposits for their units. And presumably, if I had purchased at auction, I would then own the building but I would very likely not have the security deposits.  If a tenant subsequently moved out they would want their security deposit back. Technically, I would not be a party to the lease that they had signed, but I beleive in Washington an auction buyer has to respect at least some aspects of the existing lease.  In my non-legal view, my responsibility would be to respect the lease rate and their occupancy rights (things that I have some power to control) but the former landlord still holds the deposit and the tenant could seek recourse against that person, who has a direct legal responsibility to refund (if the tenant satisfied the refund criteria).   Seems like I don't  benefit from a security deposit and should not be responsible for refunding. Also, if I sign new leases with existing tenants, I will have a difficult time convincing them to post a new security deposit. Curious if anyone has any practical experience about how that might get sorted out. 

Purchased a SFR in the Seattle area last week at the foreclosure auction and now want to finance it. I'm nearly out of room on the 10 property limit and need to shift from traditional residential SFR bank sources. Any recommendations for purchase money mortgages held in an LLC in Washington state, suppported by good credit scores, liquidity, and income? Preference for max loan proceeds.

It's important to read the whole agreement package (note and deed of trust) with the bank to understand exactly what it means before deciding.  Depending on how the document is written it could suggest that if you do a certain thing, then you are in immediate default and then it will list one or more remedies that happen automatically. Alternatively, it could say that by signing this document you agree to certain provisions, like not renting rooms.  Or it could not be in the form an agreement and it just says if a certain thing happens then the lender has the right to do certain things. That last approach is not the same as a promise or agreement on your part, and perhaps (depending on the language, etc.) its more of an articulation of cause and effect rather than agreement and default. In which case, its up to you if you want to face those consequences. In that case you have not done anything wrong by taking in tenants, just triggered a right on behalf of the bank. If the consequences are that the lender has the right to call the loan, you might conclude that they won't.  Also, i wonder how they would know that you had roommates. Normally if you pay on time, the lender doesn't look in the windows to check how many occupants.  Also normally no reporting requirements like copies of future tax returns, where they might see rental income from that address. I'm not a lawyer, just some things to look into. 

I have used Home Depot for color match many times, and the color is normally pretty close. But not so close that I can just do spot painting, I generally have to paint the whole wall. Then one time I went to Sherwin Williams because I had an old SW can with a color code. Here is a recreation of the conversation: SW “we have different color codes now so we will have to do a color match, it will take about two weeks.” Me. “Two weeks! Home Depot can do it in 20 minutes” SW “does it match?” Me. “I’ll be back in two weeks” So I agree with. If you want a perfect color match, go to a good paint store.