All Forum Posts by: Brian Eastman

@Mike Hurney 

A forum such as this is not appropriate for specific technical matters, and I do not have enough facts about @Adam Johnson 's situation to provide detailed recommendations. 

Sure, I could spend a bunch of time writing a long post listing 5 or 6 different approaches that nobody would read, but would it really fit Adam's goals?  Could I effectively illustrate the impact of UBTI and compare that to the option of being a hard money lender in a few sentences? Not really. 

Based on the thousands of investor conversations on the topic we've had over the years, we know that one-to-one consultations are the most effective means to educate. I mentioned that Adam is welcome to contact me directly, which would provide a vastly superior opportunity to learn about his options. Self directed IRA's are an area where generic one-size-fits-all approaches simply do not apply.

In the internet age, we all want instant gratification.  I get that.  But I also resist the temptation to meet that desire at the expense of quality information.  I participate in this forum to help where I can and encourage those who want to learn more to speak directly with a professional.  Whether that is our firm or someone else is up to them.

@Adam Johnson 

Your last post came in as I was writing the above. The issue is that, albeit indirectly, you are utilizing your IRA's capital in your own personal project. This is clearly prohibited.

@Adam Johnson & @Brandon Hall 

Yes, Adam and his associate could effectively pool their IRA funds to joint venture into real estate transactions together. The idea is that it would be the IRA's doing the investing, and not Adam and his associate.

The returns would go to the IRA accounts. There is the additional limitation as @Daniel Dietz points out, that they would only be allowed to "direct" the investments and could not participate with their own labor or the labor of parties disqualified to either IRA.

Flipping is something that can be done with IRA funds, but comes with exposure to taxation known as UBTI, as this is viewed as a business activity as opposed to a passive investment such as rental income or note payments received. Even with this tax, the IRA can potentially receive ROI that is favorable when compared to other investments one might make with an IRA.

An alternative approach for using an IRA with flip opportunities is to be the bank rather than the flipper. Lend money to someone flipping a house and that interest is deemed passive and therefore not subject to UBTI. Of course, Adam's IRA should not lend to his friend to flip, while his friend is at the at the same time using his IRA to lend to Adam to flip, as this would still be looked as an an indirect transaction between each parties IRA and themselves.

@Adam Johnson 

This would be a no-no. There can be no direct or indirect benefit between an IRA and a disqualified party - namely yourself. To utilize your associate in this way would be an indirect transaction between the IRS and yourself and if the IRS saw it, they would wipe out your IRA. Not worth the risk.

There are a lot of perfectly legitimate ways you can use your IRA to invest in real estate and generate good returns. It just has to be exclusively for the benefit of the IRA.

@John Anderson 

There is, of course, no single right answer. Generally speaking, a LLC is a simple and easy to administer form of entity. Depending on your activity types and the tax profile they produce, you may find advantages in S-corp tax status (either under a LLC or a corporation with the S option). Asset segregation will be another question you may wish to address.

The ONLY way to make a good determination on entity type specific to your needs is to consult with a licensed tax professional.  Forums and books are great ways to prepare yourself for that conversation, but cannot replace the expertise of a professional.

The Solo 401(k) is an excellent choice of a retirement plan if you will be generating significant earned income and wish to set aside some of that for your future.  You do not need to decide between tax-deferred OR Roth, you get both and can adjust your contributions in a given year based on your tax situation.  If you are younger, there can be a tremendous benefit to the Roth savings over the long term.

@Daniel Francis Did Quest advise you regarding exposure to UBTI taxation with the type of investments you are engaging in? Sounds like a dealer activity that would be considered engaging in a trade or business subject to UBTI. Can still be a very good ROI after-tax, but you want to avoid a surprise tax bill down the road by knowing if you have exposure.

@Brandon Holtzinger 

This is a good question and one we hear frequently here at BP and with clients contacting our firm regarding self directed IRA & 401k plans.

An employer 401(k) has its limitations, and most of us who invest in real estate know we can do better than what wall street investments provide.

However, @Chris Soignier hit the nail on the head. That 401(k) match is effectively a risk-free 50% ROI. So, if you can participate in an employer 401(k) and get a match, that is one of the best things you can do for your future financial well being.

In addition to the employer match, you are also effectively getting a match from the state and federal government equal to your marginal tax rate, since contributions to the plan are tax deferred.  Likely for every $1000 you could put in your 401(k), you would see the equivalent of $350-400 of after tax funds you could use to invest with if you opted not to participate in the 401(k).

At some point, you will change jobs or retire. At that time, you can then rollover the funds from that 401(k) into a self directed IRA or 401(k) that you can use to invest in real estate on a tax-deferred basis.

A good wealth planning strategy is to have multiple strategies or streams of income.  If you can invest in real estate personally, that is great, and one of the best ways to put yourself ahead.  You should also have a retirement plan and take advantage of a company match and the tax-deferral on contributions and the income the plan receives.  If at some point you have the ability to invest that tax sheltered retirement savings into real estate and get better returns than you can from the market today, great.  By aggressively contributing now, you'll have a nice big lump of cash in that 401(k) to invest with in the future.

@Jeff Wallace 

Excellent.  Ultimately, the answers will be pretty specific to your particular situation and business activities.  The trick is finding that CPA who is aggressive, but not over the line.  Take your time selecting a tax advisor for your business.

Best of luck with your new venture!

@Jeff Wallace 

Are you working with a reputable firm to establish the Rollover As Business Startup structure?  They should be able to assist you with this type of question if so - at the very least by recommending a good CPA in your area.  If they cannot, you chose the wrong firm to work with, I'm sorry to say.

The concept is that the operating business must be established as a C corp.  The reason is that only a C Corp has specifically valued shares.  The C Corp establishes a 401(k) - or preferably in most cases a Profit Sharing Plan.  You can rollover existing tax-deferred retirement savings into that new plan.  The plan then does an Employee Stock Option Purchase of the parent company shares, which is accompanied by an independent 3rd party valuation of the company stock.

Once funded in this manner, you can operate the C Corp to flip houses and that retirement capital is simply treated as any other shareholder capital of the corporation.

The best way to reduce your taxable income is with new deferrals into the profit sharing plan.

The business can have legitimate operating expenses as well, and working with your CPA, you can determine what specifically is appropriate in your business structure.

@Harold Groetsema,

Welcome to BP.  It is a great resource.

There is no single answer to your question regarding the comparative benefits of a self directed IRA vs a Solo 401(k).  Which plan is best for you will depend on many variables such as your current age, investment goals, tax profile, etc.

The best way to get started on answering that question is to contact one of the reputable firms offering self directed IRA & 401(k) plans.  A good advisory company will take the time to learn about your situation and help you ask yourself the questions necessary to chart the best course.  

Even then, keep in mind that most plan facilitators, while knowledgeable about their specialty products, are not acting as your CPA and capable of providing the type of comprehensive analysis of your personal situation that a licensed tax advisor can, so you may likely want to learn about your plan options then confer with your tax professional to confirm your approach.

Best of luck to you as you get familiar with BP!

Steven,

Not exactly a recommendation - or a very biased one anyway.  My firm implements and supports the Solo 401(k), and have done so since 2005.  All of our advisors are seasoned real estate investors, and of course all plan legal work is done by our tax attorney with more than 20 years experience in this field.  In addition to plan setup, we provide ongoing expert guidance.  Please feel free to contact me.