All Forum Posts by: Doreen Chaisson

While the accounts are most likely too small to purchase RE, you can use the funds in a Self-Directed Coverdell/ESA to invest in private REITS, or to make private mortgage loans, secured loans, unsecured loans or convertible notes to other non-disqualified parties/companies.  The two accounts could also co-invest with others on larger investments; their IRAs would have a fractional ownership percentage.    One thing to be aware of - many alternative assets are illiquid - when it comes time to start paying for educational expenses, you want to make sure the money you need will be in the accounts.  That could be a challenge if its tied up in a piece of RE or any kind of partnership.  Your timing will be critical to meeting the goals you've set up these accounts to achieve.

Day trading is still considered passive investing - buying, holding (even if for 3 hours), and selling.  Actively purchasing real properties for the express purpose of rehabbing/improving and flipping is a completely different animal.  

I am not sure, and have been told it varies by state although don't quote me on that.  Hence my suggestion to talk to a knowledgeable CPA or perhaps RE attorney.

It's not so much self dealing, as your IRA running what's considered an active real estate operating company because of all the flipping (as opposed to a more passive "buy/hold/rent" type of investing). If your IRA is deemed to have reached "Dealer Status", capital gains derived from these transactions could be subject to UBIT tax, which must be paid with IRA funds. Consult with a knowledgeable CPA, who is familiar with Self-Directed IRAs and UBIT tax triggers.

Self-Dealing would be something like buying assets from disqualified parties with IRA funds, selling IRA assets to disqualified parties, renting or leasing the property to yourself or any disqualified parties, getting any type of direct, indirect or even perceived personal benefit from an IRA investment, and so forth.

If you purchase a piece of property with your IRA funds, you cannot do any of the maintenance or repairs yourself. You can''t buy a piece of property that your or any disqualified parties currently own, have ever owned, live in or plan to live in. You must hire 3rd parties to perform maintenance & repairs. They must be paid for their work out of the IRA. Similarly, you cannot pay for any repairs personally and then expect to be reimbursed by your IRA. Any expenses related to the IRA-owned property, including insurance and property taxes, must be paid with IRA funds. Hence it's important to have either a good cash reserve in the IRA or to be sure the property is reliably income-producing. All income produced by the IRA-owned property must flow back to the IRA, you cannot make any personal use of these funds, as it would be considered a taxable distribution from your IRA, also subject to early withdrawal penalties.

Full disclosure, I work for a SD IRA company,

Will your IRA have enough money to purchase and pay for all renovations needed? All expenses related to your IRA asset must be paid for with IRA funds. When borrowing with your IRA, your IRA must secure a non-recourse loan. There are a limited number of banks who offer these types of loans to IRAs and they almost always require the property to be income producing. They typically require a much larger down payment than a traditional mortgage (40% or more), will require a cash reserve in the IRA to buffer against loss of rental income, and generally structure the loans as 3 - 5 year ARMs. Some have restrictions on the types of properties they'll lend on (no raw land or no mobile homes, for example).

Your IRA is responsible for making the mortgage payments to the lender. If the property is income-producing, the portion of the net income attributable to the leveraged part of the purchase will be subject to UBIT tax. Rough example, if you put 60% down and finance 40%, about 40% of the net income after deductions will be subject to this tax. This tax also must be paid by your IRA, not with personal funds. You'll need an accountant to help you calculate your UBIT tax due each year.

Finally, when you sell the property, if there has been a loan in place within the previous 12 months, your IRA will also owe capital gains tax on any gain from sale. If there's no loan in place for 12 months and one day, then all proceeds flow back to the IRA untaxed until distribution (or not taxed at all if in a Roth).

Even if you get a loan from a private lender or use seller carry-back, that loan must also be structured as a non-recourse loan. You cannot personally guarantee any loan to your IRA, nor secure a personal loan collateralized by an IRA asset.

As you can see it's extremely important to consult with a professional before proceeding with any IRA investment.

Not sure where you are getting your information from.  If you are a single filer, you can contribute to a Roth up until $117,000 AGI. At $117,000 the phase-out begins, and once you reach $132,000, you're ineligible to contribute.

If you are married filing jointly, it jumps up to $184,000 for phase-out, $194,000 to be completely ineligible.

Here's a link to learn more  - http://www.rothira.com/2016-roth-ira-limits-announced

Also if you plan to use financing within the IRA, you'll have to secure a non-recourse loan. NRL lenders typically require much larger down payments, hefty cash reserves in the account, and generally offer 3 - 5 year ARMs. I'm not aware of any commercial lenders in this space but there may be some you can dig up. Many won't lend on mobile homes at all; you may need to find a private lender (or perhaps the seller) who'd be willing to structure the note as a NRL. Using leverage within your IRA triggers a tax called UBIT that's tied to the financed portion of the net income.

You'll pay income tax (if not a Roth IRA), penalties and most if not all IRA custodians charge a fee for processing distributions. If you must take distributions, you might want to consider taking fewer distributions, maybe quarterly, to minimize the bite fees will take out. As Brian said, your CPA should be able to point you in the right direction.

Keep in mind you want to be sure there is enough liquid cash in the account to cover property taxes, insurance payments, unexpected or needed repairs or improvements to the properties, utility bills and so forth. If you take the money out, you'll be limited to your annual contribution limit to put money back in should your IRA be facing an expense. If, for example, your IRA-owned property is hit with a $10,000 roof or septic repair and you don't have enough cash in the account, and you're limited to a $5,500 annual contribution, how will your IRA bridge the gap to pay for that repair? You absolutely can't use any personal funds to pay for bills or other expenses incurred by the IRA owned property. There are certain circumstance that may allow you to make a short term loan to your IRA at 0% interest (DOL PTE 80-26 is the code governing this) in order to preserve an IRA asset.

At the end of the day, the goal for any IRA investment is supposed to be to grow your IRA's wealth for your later use in retirement. Continually funneling out your proceeds is counter to that goal.