All Forum Posts by: Brian Eastman

@Kevin Hofstee

Yes, that is correct.  Income issued to you on a 1099-NEC would be reported on a Schedule C as I noted above, and would be deemed earned income.  That would allow you to sponsor a Solo 401(k), assuming you do not also have any full time employees in any business you control.

@Julie Mendonca

A self-directed IRA or Solo 401(k) may be an option for you, but it is not a way for you to access the funds. With such a plan, you still retain the tax sheltered benefits of income to the plan, but the plan is configured differently so it can invest beyond the stock market into things like real estate, private mortgages, venture capital, etc. So, rather than you accessing plan money for you to invest in real estate, the plan is investing in real estate. It is a way to diversify and take more control of your tax-sheltered retirement investing.

The plan buys and pays for an investment, as well as any necessary operating expenses.  The plan receives the income produced from rental, sale of the property in the future, etc.

You cannot personally benefit today, such as by paying yourself a management fee, using plan-owned property personally, etc.  Everything needs to be done at arm's length and exclusively for the benefit of the plan.  

A self-directed plan can be a great way to put an old retirement plan to work if you know real estate and can achieve better security and returns as a result.

@Tim Criswell

There is nothing that would violate the tax rules in what you outline.

You are allowed to administer your IRA, which includes making decisions, hiring vendors, paying the expenses of acquisition and maintenance of IRA assets, and receiving the income produced from investments into the plan.

So long as all of your actions are via the plan, and for the exclusive benefit of the plan. You are OK. You cannot personally benefit from the IRA, such as by paying yourself a management fee or living in an IRA owned property. Likewise, you cannot inject value into the IRA via the provision of goods or services above and beyond basic administration. That means you should not be working on the property personally or turning yourself into a delivery person making daily trips to the hardware store.

But, while flipping houses can be done within the IRS rules... there is a potential catch.   

An IRA is tax-sheltered when it receives passive investment income such as interest, dividends, royalties, rent from real property, or the capital gain on a passively held asset. Flipping houses is not such a passive activity, and is considered a trade or business - think manufacturing or maybe "re-manufacturing" property for sale. When a tax-exempt entity engages in a trade or business on a regular or repeated basis, the gains are treated as taxable Unrelated Business Taxable Income (UBTI). The trust tax rates that an IRA pays can ramp up to 37% pretty quickly.

As such, the occasional and infrequent flip in an IRA (in a hand's off fashion) can work. A focused strategy of buy/fix/sell/repeat would expose the IRA to taxation that negates the benefit of deploying the IRA into the opportunity.

Alternatives without the UBTI exposure include:

Using the IRA as a bank and lending money to unrelated flippers for passive interest income.

Buy/fix/hold as a rental for at least 12 months before selling. (What I like to call a Hybrid Flip).  The year of passive income usage recharacterizes the transaction as passive so there is no UBTI concern.

@Ryan Nunya

You need to speak with an expert.  You are mixing concepts and terms to the point where it would be difficult to sort out on a web forum. (Which is not unusual, so don't feel bad.)

The Solo 401(k) has very powerful contribution capacity for either tax-deferred or Roth tax treatment.  You can also perform in-plan Roth conversions of tax-deferred funds.

@Ryan Nunya

You are correct that short-term rentals are a different animal for tax purposes than purely "rental" income as noted in the original post. STR above certain thresholds is generally considered a services business more akin to a hotel, not passive rental income.

Confirm with your CPA on the best approach to form and perform tax reporting for your short-term rental business.  That business could then very likely sponsor a Solo 401(k) plan.

@Shane Edwards

A self-directed retirement plan is not a means for you to creatively use funds for your real estate deals.

As a retirement plan, the money is tax sheltered.  To maintain that tax-sheltered status, all investments made with the plan must be at arm's length, and may not create any transactions or benefit between you or what are referred to as disqualified parties (spouse, parents, children, family businesses, etc).

The purpose of a self-directed plan is diversification and control.  If you can better protect and grow your retirement savings placing the plan into investments such as rental properties or private lending, great.

The plan could purchase a property and execute a BRRRR, but your role is limited to being a "fund manager" and making sure the contracts are signed, vendors paid, etc. You cannot work on the project, mix IRA and personal funds, etc. The plan is the investor, not you. The loan would need to be non-recourse, which means no personal guarantee from you and also a lower LTV and some reserve requirements you might not see in a personally backed loan. BRRRR transactions are possible, but will be less aggressive than with personal funds. But, you get to use leverage within your IRA and have more control over the outcome than you would investing in equities or funds.

There are several specialty firms that offer self-directed IRA and Solo 401(k) plans active on BP. Do some reading and make some phone calls to get educated on what is possible.

@Steve Smith

It is generally the obligation of an issuer of income to report that income on form 1099-NEC.

If the recipient of the income is your IRA, then there is no confusion. The IRS will not expect to see that income on a tax return.

You can submit form W-9 to the issuer and illustrate the tax-exempt status of the IRA. In that case, they may choose not to issue form 1099.

Please work with your IRA custodian or tax counsel for detailed guidance.

@Josie W.

Whether investing in real estate with retirement plan funds or personal funds is "better" is a difficult question with no one answer. They are very different approaches, just like investing in stocks with personal vs IRA funds.

The primary reason to consider investing retirement funds in real estate is if you believe you can protect and grow your tax-sheltered retirement savings better by having the plan investing in real estate rather than what it is invested in today.  It is all about asset choice and diversification for the retirement plan.

Whether an IRA or Solo 401(k) will best suit your needs depends on your situation. A Solo 401(k) is only available to someone who is self-employed and has no non-owner employees in any business they control. Rental properties produce passive investment earnings, not self-employment income. So, unless you have something else that produces earned self-employment income, the IRA route would be appropriate.

There are several quality providers of self-directed plans active here on BP.   Do a little reading then get on the phone with a few.  You will learn quickly about the opportunities and limitations of a self-directed retirement plan.

@Joseph Hammel

You should speak with a CPA about the benefit of turning rental income into earned income so that you can set it aside into a 401(k) plan.  It may not make sense.  You certainly do not just "pay yourself".  You need to have a separate entity and a distinct plan around making such a structural change to your rental business.

@Joseph Hammel

I am 100% sure you cannot rollover a Roth IRA to a 401(k) plan.

Here is the IRS rollover chart.

https://www.irs.gov/pub/irs-te...