All Forum Posts by: Doreen Chaisson

Unfortunately, you cannot do this. The return the IRA earns on the exit fees must be consistent with its percentage of investment. Funneling more of the exit fees to your IRA than it should earn would be considered an illegal contribution to your IRA.

You would need to structure two separate notes - one from your IRA to the borrowing entity, and the second, a personal note from using your personal funds to lend to the entity.

Also keep in mind that there are certain prohibitions on lending with an IRA. For example, you cannot lend IRA funds to any disqualified parties: yourself, your spouse, your parents, grandparents, children, grandchildren or any spouses of descendants. There are also some other, more obscure disqualified parties - be sure you are running your proposed scenario by a CPA or attorney or qualified Self-Directed IRA custodian, to be sure you are not running afoul of any IRS regulations.

To clarify a couple of points - Your company will have one Solo(k) plans with two participants - you and your wife. Your wife does not have to have any ownership in the company to participate. Solo(k)s are structured for company owners and their spouses as participants (regardless of if the spouse actually has any ownership in the company). Your two Solo(k)s would then simultaneously co-invest either in a piece of property directly, with percentage of ownership dictated by percentage of investment - OR - you can form a new LLC just for the RE investing. Your Solo(k)s would simultaneously invest in this new LLC - the LLC would have its own bank account to be used for expenses, purchases, income generated, etc. Net proceeds of the LLC would flow back to your respective accounts based on percentage of ownership.

Your Solo(k) can have 4 "buckets" - pre-tax salary deferral, post-tax salary deferral (Roth "bucket), profit sharing , and rollover. Please note that Roth IRA funds CANNOT be rolled into a Solo(k). Only traditional IRAs, old 401(k)s, etc, can be rolled in. The only way to add Roth funds is via post-tax salary deferral. The Profit Sharing "bucket" is always with pre-tax dollars. Profit Sharing cannot be done post-tax, since it's profits from the company flowing directly to your account, not being paid to you as income.

All expenses and income need to be split proportionally based on percentage of ownership of each IRA. The IRA's cannot "take turns" paying for expenses.

If you have a Single Member LLC owned 100% by your IRA only, you can continue to contribute to or rollover funds into your IRA from other retirement accounts, and then add capital to that LLC as often as you want.

Hi again - if you wish to make the investment via LLC, your IRA or your Solo(k) would need to invest in a newly structured LLC. It works the same way for both accounts. Keep in mind any insurance on the property needs to be paid for with IRA/Solo(k) or IRA/Solo(k)-owned LLC funds, not personal funds.

You cannot use your IRA-owned property for storage of your personally owned items, regardless of who is using them. Furthermore, any maintenance on your IRA owned property should be done by an outside "vendor" using his/her own tools and equipment. By "lending" them your personally owned tools for maintenance on the IRA-owned property, you could be getting a reduced fee for the work done. Their use of your owned tools/equipment could be construed as an illegal contribution to your IRA - since your personally owned items are being used to improve/repair the property.

If the lawnmower, tiles or anything else are purchased with the IRA's funds for use on that property or any other IRA-owned properties, then they can certainly be stored there.

Your self-directed IRA would not be able to invest in an existing LLC that you already own personally.

SD IRA money can be used to invest in a new LLC or can be used to invest in real estate directly. The LLC would most likely be a single member LLC for which you, as IRA owner, would have "checkbook control" on that LLC's bank account. Many custodians will ask that you appoint a Special Advisor (licensed CPA or attorney) to review all the transactions of the LLC to ensure there are no prohibited transactions taking place. Be aware that if you intend to use this LLC for multiple purchases/flips, it could be considered an operating company and the net revenue may be subject to UBIT tax. If you are "buying and holding", then the LLC's purpose would be passive investing and would not be subject to UBIT. Be sure you check with a CPA or attorney to clarify the purpose of your LLC and the possible tax implications.

In the case of a direct Real Estate purchase, all purchase expenses & closing costs must come from the IRA, as well as all funds for repairs, improvements, insurances and tax payments. All rental income flows back to the IRA. The property you purchase cannot be anything you or any disqualified parties (generally your parents, grandparents, spouse, children, children's spouses, etc) currently own or have ever owned, or have made or will make personal use of. It must be an property that is strictly for investment purposes only.

As @Frank M. pointed out, you'd need to have a cash reserve in your IRA in the event of an unexpected repair, or vacancy that limits or stops income generation. Many custodians will ask you to appoint a property manager (again, an unrelated third party) to manage the payments, rental collection, and repairs. You cannot pay for any repairs to the property with personal funds, nor can you make any of the repairs yourself - not even mowing the lawn.

If you involve your IRA money in the investment, your IRA becomes a co-owner of the property. This triggers a number of factors to consider: you, your spouse, and any of your ascending or descending family members (and descending family member's spouses) cannot make any personal use of the property and are also prohibited from doing any repairs and maintenance on the property. Painting, repairs, lawn mowing, lightbulb changing all will have to be done by an unrelated 3rd party. Most IRA custodians will make you hire an outside property management to handle these items, as well as paying the bills. All expenses are split proportional to ownership, as well as all income generated.

Furthermore if you combine your own personal and IRA funds for this purchase, you will be unable to get a loan to finance the balance of the purchase as it's illegal to use an IRA asset to collateralize a personal loan.

However, if you have enough funds in your IRA for a 30% or more downpayment, plus some cash reserve, your IRA could purchase the property directly, without involvement of your personal funds at all, by securing a non-recourse loan if additional funds are needed. There are a number of non-recourse lenders that are willing to lend directly to IRAs, provided their qualifications are met. The property must be income producing and some will not lend on certain property types like raw land or mobile homes; others require higher down payments, and so on.

The IRA itself is the borrower and the IRA must make the monthly mortgage payments. Be advised that purchasing real estate with leverage in an IRA kicks off a tax called UBIT - Unrelated Business Income Tax - on the leveraged portion of the income. For example, if you finance 40% of the purchase, roughly 40% of your IRA's net rental income after exemptions will be subject to this tax. A good accountant or CPA can explain how this works - it's a pretty complex calculation but one you need to weigh when considering your options. If you need to finance only a small portion of the IRA's property purchase, UBIT may be negligable.

A transfer tax is applies to the SALE of a property in most, if not all states/counties. A retitling of a property (with no cash exchanged) should not trigger a transfer tax. If, in your state it DOES apply to retitling, it would be tied to the dollar value of the portion of the property being transferred (aka distributed from your IRA), so you won't be paying on 100% value of the property each year, only the portion you distribute. Some states and/or counties have exemptions to this transfer tax; check with your local registry of deeds to see if conveyance of IRA-owned property to you personally would trigger a transfer tax, and check to see if this transaction qualifies for an an exemption.

It's important to note that you or any disqualified parties cannot make any use of the property until it is distributed 100% out of the IRA.

There's a little more to the story that you need to know when pledging an IRA-owned asset as collateral for a loan. There is not an invisible line dividing the IRA-owned half of the property from the partner-owned half. Whether or not the IRA is a signer on the note, the entire property is used as collateral and as such, is subject to risk of loss in the event of default. While the partner is free to secure a loan, with recourse back to him, most banks are going to ask that both owners sign the note, and are going to require that both owners sign the mortgage (the note instrument and the mortgage document are two separate items in play here). If they require both owners to sign the note, this would necessitate a non-recourse loan due to the IRA's involvement. If you do find a friendly bank that does not have this requirement, it will most likely not be a typical mortgage and will more than likely have a higher interest rate.If your IRA is not on the note, a Trust officer from your IRA custodian will still need to sign off on the mortgage documents on behalf of your IRA as co-owner of the property. You, as the IRA owner, will still need to sign off as "read and improved" on the mortgage docs, even if your IRA is not listed as a borrower. This would be true whether using an IRA or Solo(k). The only difference is that, when using an IRA, both borrowing scenarios will indeed kick off UBIT for your IRA on any net profits generated by the property attributable to the financing.