All Forum Posts by: Brian Eastman

You simply cannot do this. Your IRA cannot purchase anything from you as you are a disqualified person to your IRA.

@Christopher Shutrump

When an IRA invests in a syndication, leverage is generally used.

As a result, the IRA is subject to tax on Unrelated Debt-Financed Income (UDFI). Basically, the portion of the income that the IRA is receiving from the non-IRA (borrowed) money in the deal is taxed.

When filing the 990-T return for UDFI, the IRA can take advantage of straight line depreciation, but not accelerated depreciation.

When the deal closes out and the IRA receives a capital gain on sale, prior depreciation taken is recaptured, just like with any other investor.

Taxes and deductions that may apply inside of the IRA do not carry over to your personal taxes when you ultimately take a distribution from the IRA. All distributions are treated equally as regular income to you in the year of distribution, regardless of how the earnings were generated within the IRA.

The bottom line is that leverage boosts return. This is true even when an IRA may be subject to tax on UDFI. The tax should be considerably less than the increase in rate of return that leverage produces.

The activity taking place on your property is the issue.   

The IRA could hold a rental property (short/mid/long term are all fine) so long as there is no nexus with you or other disqualified persons to the plan (mostly lineal family).

So the IRA would own the property, pay for all expenses and receive all income. If there is extra cash flow, you can have that distributed to you from the IRA if you are over age 59 1/2, just like you could with any other IRA.

Having a property in your IRA that produces distributable income is a great strategy. You can live off the earnings without needing to deplete the principal value of the account.

@Mark Wialbut

You cannot do that. You are a disqualified person to your IRA. Any transaction between you and the IRA can disqualify the IRA and have severe tax consequences. Having the IRA put money into your personal property would be a clear violation of those rules against self-dealing.

@Jeffrey A DeAngelis

Partnering between your IRA and personal funds is one of those things that exists on the internet and is {technically} possible, but is taking on a lot of potential risk.

If you wish to pursue such a strategy, do not rely on online resources and get an experienced tax attorney on your team.

Basically, there is 1 way it can go right and there are multiple ways it can go wrong, with severe tax consequences if that happens.

You do not partner between your IRA and yourself when you buy shares of a stock. This should be no different.

As a plan provider, I cannot make a specific recommendation as to a company to work with per BP guidelines.

What I can help you do, however, is refine your question.

Self-directed IRA's come in several formats offered by different types of companies. The type of self-directed IRA that will best suit your situation and goals will drive the process of identifying the right firm to work with.

A self-directed IRA custodian is a processing entity. Think E*Trade or Fidelity with different paperwork. All IRA based plans are required to have a custodian to administer and report on the account. What makes a self-directed IRA custodian different is that they are not purely connected to the public exchanges and limited to investing in stocks, bonds and funds, but rather have the staff training and paperwork to document the IRA's investment in the more individualized transactions that occur when investing in real estate, notes and other non-traditional assets. Such custodians will hold funds, sign documents, issue expenses and receive income on behalf of your IRA and act as your processing layer. This works OK for relatively static and simple investments like a private placement or crowdfund, but can become rather cumbersome and expensive with a more time sensitive and transaction intensive asset such as a rental property. You also need to be aware that custodians are passive in nature and simply process transactions at your direction. They do not provide meaningful oversight or guidance with respect to tax code compliance.

A checkbook IRA LLC is an enhancement on the above structure that is generally more time and cost efficient for investors with a more diverse portfolio. It starts with a self-directed IRA held by a custodian, but the IRA simply makes one investment into a specially designed LLC entity. The IRA owns the LLC, but you can be the non-owner manager of the LLC and have signing authority. This allows you to directly manage transactions via the LLC and eliminates the paperwork, processing delays and per-transaction fees of the custodian. These plans typically cost a bit more to establish due to the legal work, but in most cases will save you considerably over the long term. With a quality provider, such plans also come bundled with meaningful consulting guidance to help you get the most out of the program while staying inside the IRS guidelines.

A similar checkbook program is a Solo 401(k). Such plans are available to those who have some form of self-employment and no full time employees. As an owner-only business retirement plan, the Solo 401(k) has higher contribution limits, allowing you to build your savings on the front end as well as providing investment flexibility. The Solo 401(k) also has the advantage of being more favorable for real estate investments using debt-financing such as a mortgage - as the 401(k) is exempted from a small tax called UDFI that an IRA would pay on the percentage of income derived from the borrowed money.

So, as you continue your research and get feedback here on BP, think about what type of program will best suit your needs and be sure to ask questions along that line. Get on the phone and speak with a few of the providers that are active here on BP. You will pretty quickly be able to tell who is just selling something and who can become a valuable member of your team.

@Ryan Sing

While an IRA may be used to invest in real estate in many ways, it is not designed to provide additional capital to your flipping business.

As a tax-sheltered vehicle, all investments of the IRA must be conducted at arm's length and exclusively for the benefit of the IRA. That means you cannot have any transactions or provision of benefit between the IRA and yourself, your spouse, lineal family, or family owned businesses.

So, you cannot add IRA capital to your own flipping deals. You also cannot work on a property that your IRA owns.

The IRA could invest in a property and have unrelated contractors fix the property in preparation for sale. The gain on sale would go back to the IRA on a tax-sheltered basis, so long as the frequency of such transactions is limited. An IRA is tax-sheltered when it receives income from passive activities like rents, interest, or capital gains. When an IRA engages in a trade or business on a regular or repeated basis (which frequent flipping becomes) then the IRA is subject to taxation called UBTI meant to level the playing field for tax-paying business and protect them from unfair competition.

So, generally an IRA is better suited to truly passive investments like holding rentals, private lending (such as to unrelated flippers), and syndications.

@David Mcginnis

IRA distributions are not changed based on the fact that an IRA may or may not have incurred tax on UDFI. All distributions are taxable from a tax-deferred account or tax-free on a Roth account based on standard IRS rules.

Think of the tax on UDFI as a cost for the IRA to be able to take advantage of the benefits of leverage. If the IRA contributes 40% of the cost of acquisition but receives 100% of the income produced from the investment, then 60% of that income flowing to the IRA is coming from the non-IRA money in the deal. That is what is being taxed.

The IRA is still going to receive the benefits of leverage and a higher cash-on-cash return. The boost in return that the leverage produces is dented a bit by tax on UDFI, but there should still be a net boost. A leveraged deal in an IRA will outperform a comparable all-cash deal in an IRA.

In my example where 60% of the income is taxable, the IRA gets to avail itself of the same 60% of normal deductions such as interest on the note, straight-line depreciation, etc. If there is still outstanding debt when a property is sold, prior depreciation is recaptured on the capital gain event.

Do not fall into the trap of comparing an IRA investment and tax treatment to a personal investment and tax treatment. They are always very different whether an IRA is invested in leveraged real estate or stock of a publicly traded company. The more productive exercise is to compare a leveraged syndication in an IRA to some other investment the IRA may make, and determine which will produce the best balance of risk and reward appropriate to your savings goals.

An IRA is not subject to the extra tax associated with the Affordable Care Act.

If your CPA is not familiar with this territory, seek out a professional who works with non-profit and tax-exempt entities.  The trust taxes that apply to IRAs apply to all such entities.

@Jason,

What you propose is not possible for two reasons.

You cannot mix IRA/401(k) and personal funds. A self-directed IRA is a means for your IRA to be more diversified, but the money still stays locked up in the standard tax-sheltered framework intended for future use in retirement. You cannot personally benefit from, provide benefit to, or comingle funds with your IRA.

No non-recourse lender will provide a construction loan.  Non-recourse loans are asset based, and the only security to the would be the land itself until such time as the property is completed.  That is more risk than banks are willing to take on without a personal guarantee.

A lot of people like to think "how can I take advantage of my IRA?" to achieve a certain investment goal. That does not work based on IRS rules. The correct approach is. "Can I find a way to put my IRA to work that will better protect and grow that money than leaving all of it in the stock market?"

@Victor Hoffman

The Wall Street brokerages offer versions of the Solo 401(k) that are pared down to - invest in Wall Street offerings.

There are a number of specialty providers that offer self-directed versions of IRA and Solo 401(k) plans suitable for investing in non-traditional assets like real estate (as well as conventional stocks & funds), and that support features like the loan provision.

Several, including my firm, are active here on Bigger Pockets.  Do some reading in the forums and give a few providers a call.