All Forum Posts by: Scott Jensen

@Victor Fu  A good spot to start is your financial advisor if you have one. (These must be sold by a financial advisor).

Sometimes CPA's have references as well. Check around though as the commissions and/or fees vary significantly across different advisors. Sometimes they can be as high as 6%. I do them for 2-3% for ongoing clients, and 3-4% for one time transactional clients.

@Brett Carter When you're interviewing 401(k) custodians, make sure the custodian allows for Voluntary-After-Tax contributions and In-Plan Conversions. This allows you to contribute up to $58k to the Roth side of the 401(k) and doesn't have nearly as high of income limits. Also, there's a benefit of the contributions not reducing your QBI deduction (profit sharing contributions reduce your QBI).

@Troy DeLong What did you end up doing?  Did you get the self directed solo k set up and invested in a property?

@Thomas Rutkowski What is the purpose of moving the properties into an LLC before gifting them to a Donor Advised Fund?

@Dennis Pressey Jr  Could you explain how a living trust would help?

Really, it depends entirely on his tax situation. If his income is low enough, a large portion of capital gains from the sale could be taxed at 0%. Often times its helpful to recognize long term capital gains over time. Here's a couple of things he could explore:

• 1031 each of the properties into multiple smaller properties and then sell them in separate tax years. Trading properties for a greater number of properties is a good way to sell them off without taking the full tax hit and being pushed into the higher tax brackets. Also, he could 1031 into DSTs as well.  He could intentionally 1031 the property into a smaller one in such a way that defers most of the gain but allows him to recognize some. 
• He could sell the properties to you on an installment sale. That is a great way for him to recognize small amounts of the gain (with the potential of recognizing some of the gains at 0% rates)
• He could gift some of the properties to a charity or Donor Advised Fund to avoid the taxation on the property that was gifted and generate a large tax deduction that could offset the taxes from the sale of another property. There are lots of things that make this complicated though so make sure to do your research and get professional help. There's a deduction limit of 30% of your AGI when gifting real estate and the remainder is carried forward 5 years...there's a big potential to screw it up. A mortgage on the property also can screw it up too.
• He could transfer the property to a CRT (Charitable Remainder Trust) that would give him a partial deduction immediately, give him a fixed or variable income from the CRT, and spread the capital gains out over a period of up to 20 years.

There's lots of options but it really depends on his situation and what goal he's trying to accomplish. If he is really old and just wanting to get out of actively managing properties without paying taxes he could just 1031 everything into a DST - Delaware Statutory Trust or several to spread out the risk.

I'd recommend going to the XYPN or NAPFA find an advisor site and search for an advisor that specializes in real estate. We're pretty uncommon, but there are a few of us around if you look hard enough.

Best of Luck!

Best Ever Apartment Syndication Book by Joe Fairless is a good read. I would recommend networking with a bunch of syndicators, finding a couple that seem trustworthy, and investing the minimum into a few of their syndications.  Then observe how they communicate with investors, PMs, etc. Pay attention to how they find deals, add value to the properties, and how their overall analysis looks.  I don't think its a big deal if you are only part time.

I don't agree with the advice that @Lynnette E. posted. If the trust is revocable the taxes are passed through to the beneficiaries of the trust. If it is taxed in the trust, (probably an irrevocable trust) it will be subject to the HIGHEST FEDERAL TAX RATE OF 37%!  If the trust is irrevocable and passing untaxed income to beneficiaries it is generally taxed at ordinary income rates rather than long term capital gains which could be pretty bad. I am no attorney, but I can't see a reason a trust would be helpful.

See if they can use proceeds from the sale of the property to repay the distribution (assuming they did a COVID related distribution.)  This will get their taxes back down to a lower rate to offset the taxes from the sale. They can also use the funds to contribute to 401(k)s and HSAs to reduce their income and the taxes on the sale of the property.  Otherwise you could try to do installment sales or 1031 the property into several smaller properties (maybe DSTs?) to spread the sales out over multiple tax years. If they are charitable they could use the funds to donate to a Donor Advised Fund to offset income and have a large charitable pool to donate whenever they wish.

@Nicholas Grandstaff  I have a couple comments.

1. Seems like self directing an inherited account would be a nightmare due to the required minimum distributions getting larger every year. If you're doing lending or something an inherited account works well. Buying a property in this account would be a terrible idea. There's not even a way to make additional capital contributions to an inherited account if something happens to the property and you need additional cash. (Please correct me if I am wrong on this @Dmitriy Fomichenko)
2. Cashing out the plan to use for real estate could be a good idea (especially if you're already an investor and know what you're doing in this market).  Depending on the account size and your tax situation, it may be beneficial to spread the distribution over a few years in order to avoid being taxed at a higher rate.
3. The RMDs for your situation are based on the IRS's Single Life Expectancy Table, not growth. You take the your age at the first year of distribution and divide the account value by the life expectancy factor. Each year you subtract 1 from the previous year's life expectancy factor to get your new required minimum distribution.
4. Example: 40 years old, $100,000 account value. The table shows a life expectancy factor of 43.6 so $100,000 / 43.6 = required minimum distribution of $2,294. The next year you take the new account value (on December 31st) and divide it by 42.6, then 41.6, 40.6, and so on.
5. Here's the table: Single Life Expectancy Table
6. I don't know your situation so this certainly isn't professional financial advice, but if I were in your shoes, I may look at withdrawing just enough each year to fill up the lower tax brackets. I wouldn't want to deal with the headache's of owning RE in an Inherited IRA.

NOTE to anyone else reading this, they changed the way beneficiary IRA's are treated so this is not a formula you can use for anyone who has died after December 31, 2019.

@Jennie Berger  Financial advisors all do things differently and there are many that specialize in a particular niche to provide value to a specific type of client. I responded to your CAPs below in italics.

So much great info here--thank you! A few questions IN CAPS:

A few things good advisors do to justify the costs:

• Low cost well diversified investing
• Ongoing tax planning and reviewing tax returns annually- FIDUCIARIES DO THIS? IS THIS NOT FOR A CPA TO DO?
  • Some tax preparers do long term tax planning but most don't. Tax planning (not tax preparation) is one of the competencies of a CFP Professional. I meet with clients before the end of the year and in March to do tax planning.
• Reviewing your financing options and giving recommendations- FINANCING OPTIONS..MEANING, FINANCING FOR REAL ESTATE INVESTMENTS AND THE SUCH?
  • Yes, understanding HELOCS, investment property financing, etc. Also, depending on how you're investing in the stock market, you may be able to get a margin loan or collateralized line of credit for 0.74% - 4% interest rates. These work wonderfully for real estate purchases. 
• Reviewing insurance policies periodically to make sure you have adequate coverage at a reasonable cost- NEVER WOULD HAVE THOUGHT OF THIS BUT I WILL FIND OUT ABOUT IT
  • Good advisors will review your coverage and make sure it is appropriate and help you re-shop periodically. Generally, an advisor will refer you to an insurance broker to review certain coverages.
• Make sure you have an estate plan and it stays current- THE FIDUCIARY DOES THIS? I THOUGHT I AM RESPONSIBLE TO HIRE AN ATTORNEY TO DO THIS.
  • Good advisors will give a client a good broad understanding of how assets flow at death, make sure your beneficiaries are structured properly and up to date, remind you to update your POAs, etc. I generally work pretty closely with my client's estate planning attorney throughout the process. Oftentimes the client doesn't know the right questions to ask or the items that they need an attorney for.
• Help you analyze you properties and determine what your rates of return are- HMMMMM...THIS SOUNDS LIKE SOMEONE WHO IS PART OF MY REAL ESTATE BUSINESS. WHY WOULD A FINANCIAL ADVISOR/INDEPENDENT FIDUCIARY DO THIS? HOW WOULD THEY HAVE THE EXPERTISE TO DO THIS UNLESS THEY ARE INTO REAL ESTATE THEMSELVES?
  • Some understand real estate and help with it but most don't. Almost all of my clients are real estate investors. Every year I do a rental property portfolio analysis where we take a look at the internal rate of return for the portfolio as a whole and each individual property by measuring the net cash flow, mortgage paydown, and appreciation.  Often times I am involved in figuring out the best way to finance a property and also minimizing the tax damage when a client sells a property.
• Review employee benefits and stock options to make sure you're taking advantage of whatever is offered- I'M NOT UNDERSTANDING THIS ONE. I OWN MY OWN COMPANY...CAN YOU CLARIFY?
  • For employees, Advisors read through a client's employee benefit package to provide guidance on how to take advantage of whatever the employer is offering. A good example of this is reading through a client's 401(k) summary plan description to understand the details of what types of contributions the plan allows, what the match is, loan provisions, etc. For small business owners, advisors help set up a 401(k) for the business owner and employees if they have any. 
• Analyzing pension benefit options and Social Security options- THIS ONE IS ALSO ESCAPING ME. CAN YOU CLARIFY?
• Retirement planning, college planning, charitable planning, etc.
  • Advisors help understand whether it makes sense to receive Social Security benefits at 62, 67, or 70. Sometimes it makes sense for one spouse to claim earlier and then to switch to a spousal benefit after the other spouse claims.
  • If an advisor is only managing investments, 1-1.5% is high. If they are doing some of the other things I mentioned, a 1% or 1.5% fee can be reasonable.

That describes a lot of the things I work on with clients. In my opinion, good financial planning is worth far greater than 1-1.5% and I have no problem charging a fee of 1%.  If an advisor is managing your investments only, I don't see a lot of value in that and 1% or 1.5% seems pretty high.