All Forum Posts by: Brian Eastman

@Lee S. 

You absolutely cannot rent a property from your IRA, or have it rented or used in any way by a disqualified party to your IRA. That would be a self dealing prohibited transaction and would result in severe penalties and a full distribution of the IRA.

@Andrew Grieb 

The level of IRS scrutiny is likely equal for a custodial self directed IRA vs a Checkbook IRA (wherein the LLC itself is held by a custodial IRA). At the reporting layer, which is the IRA itself, they are the same.

One of the key misunderstandings in the self directed realm is that "the custodian has your back" from a compliance standpoint.  Custodians are purely processors and if you give them the paperwork to execute a transaction and the paperwork is "complete" they will process regardless of the potential of a prohibited transaction.  Sure, if you tried to issue a check to yourself, they would probably stop and ask questions, but they are prohibited by rule from providing tax or legal guidance and when you sign an investment authorization form, you note that you are fully responsible for the tax implications of your actions.

If you work with a quality provider of a checkbook plan (as opposed to what might be referred to as a document provider), you should have access to expert guidance. So, in reality you are less likely to get in trouble with a checkbook plan - so long as you are willing to stop and ask questions if you are unsure.  At the end of the day, you are still solely responsible for compliance with the rules, but with an expert on your team, that should be easy to do.

@Account Closed noted, the potential of a Solo 401k is something you may wish to look into if you will have some form of qualifying self employment. The conversion to Roth can be done within the plan on an incremental basis - thus reducing the tax impact in any given year. A 401k is also not subject to UDFI taxation on leveraged investments as an IRA (Tradional or Roth) would be.

@Michael Hurdle 

I'll start by noting that there is no simple answer to your question. Seeking the advice of a competent professional in the field will be the best route to a plan for your specific situation.

If a self directed IRA or 401k is used to purchase property, all income from that property must be returned to the plan. There can be no direct or indirect benefit between the plan and a disqualified party - meaning you cannot receive income from plan investments among other things (except of course by taking a distribution from the retirement plan, which may be taxable).

A self directed plan may utilize a mortgage to purchase property, in which case all income still returns to the plan. The mortgage must be non-recourse. This means no personal guarantee from you. The use of a mortgage under an IRA triggers a tax known as UDFI, which is paid by the IRA. Even though the IRA pays this tax on income derived from the use of non-IRA funds, you can still achieve a higher cash-on-cash return for your IRA dollars as a use of leverage.

A self directed IRA or 401k may also joint venture with another party, including the account owner in certain well structured arrangements. In such a joint venture, the income is proportionally divided between the JV partners in accordance with their capital contributions. This type of strategy requires great care to get it right.

In @Matthew Newcomer 's case, the retirement plan is not the investor.  He has simply borrowed money from his plan, which is treated as personal funds for the purpose of the investment.

@Matt T. 

Yes, once you have access to a former employer plan, you can roll that over to an IRA or perhaps Solo 401(k) of your choosing.

You can control how the IRA/401k funds are invested, and use the funds for investing in real estate, but, the sole purpose is to grow your retirement savings for your future benefit. You cannot compensate yourself or use IRA owned properties in any way - you are simply directing your IRA into arm's length investments.

There is a lot of good information on BP in the forums and blogs on this topic, and that is a good way to teach yourself "the questions to ask" on this topic.  Ultimately, every individual's situation and goals are unique, and no web site will be able to provide you with the specific information you need to achieve success.

The best thing to do is to consult with a firm or tax consultant who specialize in this area. Self directed IRA & 401k plans are very much a niche product, but there is a community of advisors who really understand the concept and can help you out.

@Thomas Clark 

Non-Recourse lending is a niche banking product.  The underwriting guidelines will depend on various factors including the type of property, dollar value, market, purchaser, etc.

The big banks will typically only offer non-recourse loans for large scale projects such as building condo complexes, malls, hotels and the like.

Some local or regional banks will be willing to offer non-recourse loans on personally held investment properties, but they are few and far between.  For the most part, you will be better off creating private lenders in this realm.

There are lenders that specialize in non-recourse loans specifically for IRA or 401k held properties. As IRA providers, we are most familiar with this realm. Typically, a non-recourse loan of this nature will be 60-65% LTV max, with 10-15% cash reserves requirements. The main lenders offering such loans will generally want to lend in excess of $50K in order to make it worth their time and effort. Rates are in the 4.875% to 6.25% range currently - depending on the structure and payback terms of the loan.

Good luck!

@Brent Mattison 

You absolutely may not pledge your retirement account as collateral for any personal debt. Any lending or extension of credit between a plan and a disqualified person (i.e. you) is prohibited and would invalidate the IRA.

An IRA may obtain a loan, such as a mortgage for the IRA to purchase real property. In this case, the subject property is the lender's collateral.

@Edward Synicky 

Your information is incorrect.

A Solo 401(k) is not subject to the UDFI taxation that applies in an IRA to returns generated from leverage such as a mortgage.

If an IRA or a Solo 401(k) engages in a trade or business on a regular repeated basis (such as flipping more than one house), then the gains from that business activity are taxed as UBTI (Unrelated Business Taxable Income). A 401k is NOT EXEMPT from this type of taxation.

That said, you can flip houses, pay the UBTI taxation and still walk away with superior returns.  I'd rather gross 30% return on a flip and net 20% after UBTI taxes than simply earn 7-10% on a passive rental.  

@Timothy Riley 

It is pretty clear from this thread that you are not in full understanding of how a self directed IRA fits into the equation of investing in real estate. Getting it wrong can be very, very expensive. That said, with proper education, it is very easy to operate a SDIRA within the rules and grow your savings quite nicely in real estate.

Rather than rely on bits and pieces of information (some of which comes from those outside the field), I would strongly encourage you to contact a firm that specializes in implementing and supporting the IRA LLC platform.

@Stan Butler 

If you are comfortable that, over the long term, you can get better performance from stocks than real estate, then you should invest in stocks with your IRA.

Stocks have the potential for rapid growth, but also have no security in the underlying asset.  The bottom can fall out as we see from time to time.

Real estate will not be as likely to hit a home run, but rather will continue to hit singles.  The SF Giants won the World Series this year without hitting a lot of home runs.

My point was that comparing the tax implications of real estate inside and outside of an IRA is meaningless. The IRA money has the tax-sheltered status it has, regardless of how it is invested - so just pick the best assets for your IRA. If you have a big enough portfolio to invest in real assets with cash and paper assets in your IRA, that works. Diversification is always a good thing.