All Forum Posts by: William W. Humphrey

Hi James, it is never too late to take steps to better your finances!

As you are looking at investments, I encourage you to include in your

thinking that your 401k money may be able to participate in your chosen

strategy. An IRA or 401k can purchase real estate, originate loans

(often with RE as collateral), and buy into private real estate

syndication.

Hi Charlie, In this age of financial technology advancement, a checkbook control IRA is no longer the only option to cut multiple checks from your IRA economically. Each IRA custodian has different features. For instance, our IRA holders that are performing rehabs or development can use our free online bill pay to have checks sent to vendors.  We also allow other methods to streamline a project that requires numerous disbursements without you having to pay a "per check" fee.  That frees you up to make your decision about whether to create a checkbook control scenario or not based on risk tolerance, potential liability, etc.

Hi Alex, Welcome to BP. As you are coming up with your strategy, keep in mind that your retirement account (401(k), IRA, etc.) may be able to invest in real estate to produce tax-advantaged returns for you.

Stories like these are one of the things that make being an IRA custodian for real estate so gratifying. Thanks for sharing.

If your self-directed IRA buys real estate using debt, you would use depreciation on your 990-T to calculate possible UBIT (Unrelated Business Income Tax). This is generally not the case for 401(k)s, as they don't typically incur UBIT as a result of debt financed income.

Also note that because of the way UBIT is calculated, there is a strategy to take depreciation (as part of your UBIT calculation) over any number of years, pay off the debt service, wait 13 months before selling the IRA owned property, and never have to pay tax on that depreciation taken!

Certainly if your 401(k) plan is eligible for rollover, one solution would be to have the tax advantaged money stay tax advantaged by rolling it over into a self-directed IRA (or other plan) and buy the properties within the account. If you are still employed with the company that sponsored the 401(k) plan, it is worth asking the plan administrator if the plan allows for an "in-service" distribution, meaning that you can rollover some portion of your plan without tax or penalty.

When considering adopting a plan, it may be to your benefit to choose one with all the "bells and whistles" (Roth provision, loan provision, etc.).  However, the important thing is that the plan document allows you to accomplish your investment goals, specifically in this case that it allows for real estate as an asset.  A couple of items to keep in mind:  not all banks have facility with an account set up for a 401(k) (we have a list of some that do if you are looking for a place to start), and remember to factor in the cost of periodic and other restatements of the plan.

If you choose an in-kind distribution, you can spread that tax burden out over a number of years. It is essentially a titling exercise in which you distribute a percentage of ownership each year or whenever you choose. For example, in one year, you decide to distribute 20% (which means that the tax event is based on 20% of the value). When the titling on the property changes at the time of distribution, the ownership would be 80% IRA owned and 20% personally owned. Of course, the revenue of the 20% now needs to be handled on your personal tax filing. Then the next year, let's say you decide to distribute another 30% of the property. The titling would then reflect 50% IRA ownership and 50% personal ownership. And so on.

When considering the disposal of a property that was purchased with IRA money and debt. It may, in some circumstances, be beneficial to remember that debt percentage for UBIT calculation is always connected to the prior 12 full months and, specifically, the month of those 12 with the highest debt percentage. This opens the door for a strategy; if the sale of the property is at least 12 full months after the debt on the property is paid off, there is no UBIT calculation on the sale because the highest debt percentage of the last 12 months was 0%. This circumstance would also mean that the the IRA does not have to pay tax on the depreciation taken in each of the prior years' 990-T!

Hi Stefan, you definitely understand the basics. Your choice regarding the LLC is a key for the long run. There are a number of factors involved. I am happy to help you map out some of the considerations.