All Forum Posts by: Doreen Chaisson

Brian is correct in that if your IRA funds a RE purchase, you cannot funnel any of the proceeds to yourself personally.

However, if you co-invest personal funds with your IRA funds as tenants-in-common, you are entitled to your share of the income, based on your percentage of personal ownership. You can never take more than your share of profit; similarly, you can't have your IRA receiving more than it is due - it could be considered an illegal contribution to your IRA. Keep in mind, in a tenants-in-common situation, you will also be personally responsible for your share of expenses, taxes & insurance, based on personal ownership percentage.

If your IRA invests in a property with other people as tenants-in-common (whether with their personal funds or their IRA funds), it's the same - income and expenses are split based on percentage of ownership.

Check with a knowledgeable professional to be sure you're not running afoul of any prohibited transactions such as enabling (using IRA funds to enable a personal investment).

Depending on the amount of money in your IRA, you can use the funds to invest in a piece of Real Estate directly - OR - you can use your IRA as a down payment, and your IRA can secure a non-recourse loan to finance the balance of the purchase.

In either scenario, your IRA is the property owner - all income generated by the property flows back to the IRA, and any expenses (repairs, improvements, taxes & insurance) are paid with IRA funds. Earnest money deposit would have to come from your IRA. If you use a non-recourse mortgage, the IRA is also responsible for paying the mortgage payment each month, as well as for paying a tax called UBIT - Unrelated Business Income Tax - on the net income generated by the property that is attributable to the financing. For example, if your IRA puts down 60% and finances 40%, roughly 40% of the net income generated will be subject to UBIT. You'll need a good accountant to help you calculate this annually.

Non-recourse lenders generally require a higher down payment, have certain property requirements (must be income producing, etc) and the loans are generally structured as 3 - 5 year ARMS.

A third scenario would be your IRA co-investing with someone else as tenants-in-common. In this scenario, all the income and expenses are split proportional to ownership.

Keep in mind, you as the IRA owner cannot have any personal involvement with your IRA-owned property. You can't buy from or sell the property to yourself or any disqualified parties (spouse, parents, children, generally) nor rent to them. You can't do any maintenance or repairs on the property yourself - a property manager is usually recommended.

Full disclosure, I work for PENSCO. Not sure who your investor spoke to - it seems to me your investor may have been unclear on the investment structure and therefore, possibly not asking the right questions. Your investor can either invest directly into your company (exchanging IRA funds for a percentage of ownership in your company) or can loan IRA funds to your company (unsecured promissory note or secured either by shares of your company or the underlying piece of real estate).

Any IRA custodian, including PENSCO, will do a full pre-investment review, and will have a checklist of documents they need to receive and review prior to funding the investment. In order instruct clients on which documents to send, the custodian needs to know the investment structure: Private Equity investment into a company OR secured/unsecured loan to a company. These are two very different investment processes.

A non-recourse loan from a bank is fine and seller carry-back (in the form of a non-recourse loan) is also fine. 

Be aware that you cannot purchase RE in your IRA using a land-sale contract. In a land-sale contract the seller retains legal ownership of the property until the last payment is made. An IRA must take immediate legal ownership of any asset it purchases. This is not possible with a land-sale contract and is therefore a prohibited means of acquiring property.

All the gain in value on the property, as well as investment income from the rent generated, will be distributed to you tax-free in retirement with the Roth. You can also access funds from that account before 59 1/2 without penalty, as long as the account has been open for at least 5 years. By recharacterizing the Roth to a Traditional, you'll limit access to funds and be paying taxes on distributions? The only reason I can think of for needing to do this is if you earn more than the income cap and can't make further contributions to a Roth, and your Roth asset is in need of some kind of repair or has a tax bill that the Roth currently doesn't have enough funds to pay. In this event, you could refi the property with a non-recourse loan to get some working capital in the account, or you could research DOL PTE 80-26. This Dept. of Labor Prohibited Transaction Exemption allows IRA owners to make short-term, zero-interest loans to their IRAs in order to preserve an asset. It can't be used to make improvements on existing assets, or to make further investments. It's not a simple process and you need to be talking to a qualified, knowledgeable accountant to see if this is a possible solution.

You cannot borrow from your IRA to make a RE investment. You can either open a Self-Directed IRA, transfer funds from your current IRA to the SD IRA, and then purchase RE with your IRA funds. The home would be owned by the IRA, all income goes to the IRA, all expenses, property taxes, etc, are paid by the IRA.

You could take a distribution from your IRA - that would be a taxable event if it's a traditional IRA. If you're under 59 1/2, you'd also be subject to an early distribution penalty. The money is then yours personally to invest however you want.

Your 401(k)may have provisions for taking a loan - in that case, the money is distributed to you personally, and you would then be making a personal investment. You'd have a loan repayment schedule to pay your 401(k) back.

It's the net income over the course of the year.  It is calculated at the end of the year.  UBIT tax on rental income applies until the loan is paid off.  Every year, the ratio of indebtedness will change as the loan is paid down.  Year 1 it may apply to 25% of the net income generated, Year 2 it may drop to 17% of net income, etc. You need a good accountant or CPA to do this calculation as it is quite intricate.

Another factor - if your IRA sells the property while the loan is in place, or even up to 12 months after the loan is paid off, your IRA will also have to pay capital gains on the profit. If the IRA sells the property 12 months and 1 day after the loan is paid off, there is no capital gains tax. In a nutshell, the IRS looks at it this way: Your IRA didn't fund 100% of the purchase, it shouldn't be entitled to 100% of the returns until it owns it 100% outright.

Technically your 10% down payment with personal funds disqualifies that property. If you can "unwind" that transaction, rewrite the P&S agreement in the name of your IRA and then have the earnest money sent from your SDIRA, it could work.

Will your SDIRA have enough funds to purchase the property outright? If the IRA needs financing, keep in mind you'll need to use a non-recourse loan (NRL). Using an NRL to finance an IRA purchase of RE will trigger a tax called UBIT on the portion of the rental income attributable to the financing. Rough example: your IRA puts down 75% and finances 25% of the purchase. Roughly 25% of the net income, after deductions, will be subject to UBIT tax, which must be paid by your IRA.

Most NRLs are 3 - 5 year ARMS, and most lenders require 30%, 40% or more down. They'll also want to see a cash reserve in the IRA to cover any loss of rental income. They'll generally lend on income producing properties only - no raw land, etc. Each has their own specific requirements and exclusions.

If your IRA will be using financing, be sure to check with a qualified CPA before proceeding so that you're aware of the impact UBIT may or may not have on your ROI.

Whenever you do a 60-day rollover, you take constructive receipt of the funds/assets. You have 60 days to get those funds or assets back into another retirement account, or it becomes a taxable distribution to you.  If you are under 59 1/2, you'll also pay an early distribution penalty.

It's important to note that the assets/cash must be returned to an IRA in the same state it came out. You CANNOT, for example, do a 60-day rollover of cash, take receipt of the cash, take that cash and purchase an investment property, and then attempt to roll that property into a new IRA. If cash comes out, cash has to go back in. If a piece of property is rolled out, the same property, with no improvements, must go back in, in order to avoid taxes and early distribution penalties.

I have personally run across a scenario where a guy took a 60-day rollover, used the money to buy private stock that was "certain" to double or triple in value in a short time, thinking he could pocket the return on investment and put the original amount back into another IRA within 60 days. Guess what happened? The stock tanked. If he sold it he wouldn't have enough to return the same amount to an IRA - and he'd be stuck with a taxable distribution & penalties. He called the custodian I work for, asking if he could roll the stocks into an IRA, so he could hold on to them to see if the value would go up. The answer was no, because cash, not stocks, came out of the original IRA. He ended up with a $1M taxable event!

Be very careful with 60-day rollovers. That article may have been written before new tax laws were enacted that now limit people to one 60-day rollover per taxpayer per year, regardless of how many accounts you have. It's very risky to be playing games with your IRA funds, be sure to be checking with a financial professional before you do anything.

Your spouse's IRA is also disqualified from you. While your IRA and your husband's IRA could invest together in a piece of property as tenants-in-common, your IRA cannot have any transactions with your husband's IRA (cannot buy from, sell to or extend credit, etc).