All Forum Posts by: Brian Eastman

@Todd Goedeke

I don't have the numbers to do the calculations for your transaction.  There is a UDFI calculator available in the learning center of our website.

I could see where the tax amount would be higher than normal on the deal you describe. 80% LTV is quite high. Most non-recourse loans are closer to 60-65% LTV. More non-IRA money in the deal means a higher percentage of taxable income. A NNN lese will also eliminate some of the potential deductions against UDFI.

Regardless, the tax on UDFI should be less than the boost in cash-on-cash return produced through the use of leverage.  Sometimes with respect to taxation we are better asking not how much tax we paid, but how much after-tax profit we made.

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.  You will also probably gain more information relevant to you in 20-30 minutes on the phone than you will in 10 hours self-educating on the internet.

@Andy Wilson

If Huntington is FDIC insured, you have zero risk. FDIC insurance covers up to $250,000. Even if Huntington were to fail, your issue would be a few days where you could not access the funds as the Fed sold Huntington off to another bank like Chase or BofA.

If we all move our dollars to the 6 largest banks that are "too big to fail", (and therefore too big to regulate), we will not have a healthy banking system.

The banks that are currently having difficulties have been poorly run and/or overly focused in a specific niche with a high percentage of accounts over the $250K FDIC cap.

While the banking industry is being pressured by the Fed's attempts to curtail inflation, more of the issue is perception than reality.  If a bank has a strong balance sheet and reasonable liquid reserves, they should be healthy.  But, if retail clients start to panic, pull their deposits, and send them to the mega-banks, that will put unnecessary stresses on even a healthy smaller bank.

@Ryan Bandaccari

A lot of people who first learn about self-directed IRA plans immediately gravitate towards "how can I use this money?" For an investment focused person, that is a logical line of thinking.

The catch is, IRA money is tax sheltered. It is not your money today. It is money you are setting aside for your future self once you reach age 59 1/2. In exchange for not personally using the money today and setting it aside for your future, an IRA receives tax-preferred status.

The cost of that tax-preferred status is that everything the IRA does has to be at arm's length and with no direct or indirect benefit between the IRA and a disqualified person. That is a list that includes you, your spouse if married, lineal family, family owned business, and some other financially entangled people like plan fiduciaries or business partners.

So, the best question when thinking about a self-directed IRA is not, "how can I use this money?", but rather "how can I put my IRA to work in investments I understand that will protect and grow my savings better than leaving it in the stock market?"

There are a many great things you can direct your IRA into that will achieve that goal in the real estate realm. The IRA can be a private lender, own a rental property on its own or in partnership with people not considered disqualified, be a limited partner in a syndication or fund, etc. It all just has to be completely separate from personal finances. You can "fund manage" your IRA, but that is as close as you can get.

If you really want to learn more, get on the phone with one of the few plan providers on this thread who specialize in this area.  You will learn more in 20 minutes on the phone with an expert than 20 hours poking around on the internet.

@David Green

Having your Roth IRA invest in a rental property could be a good strategy. The principal of the IRA is in a secure asset that can potentially spin off tax-free rental income to you as distributions.

There are some specific rules about using IRA funds that go along with the tax-preferred status of those funds. They are entirely workable, but you really do need to understand them to approach this topic with the right mindset for success.

The best way to truly get educated will be to get on the phone with an expert like @Dmitriy Fomichenko or a similar provider of checkbook IRA programs. You will learn a lot more, a lot more quickly, and a lot more reliably, than chipping away on a web forum where half-questions and half-answers seem to dominate - just the nature/drawback of the format.

Alan,

The property is owned by the Solo 401(k).  Income is tax-sheltered into the Solo 401(k) plan.  Since there is no tax on the income, there is no need to apply deductions.  

And, you certainly cannot claim the income tax free into the Solo 401(k) and then take the Solo 401(k)'s ostensibly deductible expenses onto your own personal tax return.

@Karin Cornils

You can use a cash-out refinance on property A to provide capital for property B or potentially get a lender to do a "portfolio" loan secured by both properties.

UDFI applies to income associated with the property acquired using the debt instrument, so your statement that income from property A would not be taxed but income from property B would is correct assuming a property B only note and not a portfolio loan.

The bottom line is you want to get a CPA on you team who is familiar with these topics to help you strategize.

@Austin Ralls

An investor with a self-directed IRA or Solo 401(k) is not "pulling money from" the plan. The plan is investing in a note instead of investing in a stock. There are rules about using such plans, notably avoiding any transactions with yourself or lineal family. So your business cannot accept a loan from an IRA in your father's name, for example, but could from a non-family member you know through your business network. There is no IRS mandated timeline surrounding an investment.

You should find an attorney or CPA locally who is familiar with how self-directed retirement plans work. We generally tell our IRA clients that "if someone asking you for money does not understand the basics of self-directed IRAs, they are not sophisticated enough to deserve your IRA's investment". It is not hard to get there, or to get an expert on your team who is, but you should definitely become more knowledgeable on the topic before you start asking for or accepting self-directed IRA money. It will serve both you and your potential investors well.

A good way to find people with expertise is to check with the local real estate investor club or a title agency that works with investors. They will know the attorneys who are writing note contracts for people using IRA money.

IRA money can be a great source for funding deals. People are unsure of the stock market. If you can show them a track record of success in putting together and executing real estate deals, then people will want to invest with you.

@Jaden Lowe

Within limits, what you are looking at may be possible.  As @Tiffany Colvert outlined, the IRA is the investor, not you. The IRA still gets tax-free Roth status, which is great. I like to describe self-directed IRA's as "same IRA, different investment choices". The plan architecture and servicing facilitate the IRA being able to invest outside the stock market in things like rental property.

There is a lot of content here on Bigger Pockets in the Tax & Legal forums.  https://www.biggerpockets.com/...

Several plan providers are active contributors to the forums, so do a bit of reading, see who looks to be bringing expertise to the table, and make some phone calls to learn more.

@Kenneth Bentley "Self-Directed" is a very broad term and simply means that you, rather than a financial advisor, make the investment decisions for the account.

Most conventional brokerages like Fidelity offer self-directed IRAs, but they limit you to investing in what they sell, which is just the stock market.

A truly self-directed IRA is generally offered by a specialty firm that has the capacity to process transactions for alternative assets such as real estate. The IRA itself is the same with respect to contributions, distributions, reporting, and inheritance. The difference is the ability of the plan to be invested in a more diverse choice of assets, including real estate.

There are several quality providers of self-directed IRA services active here on BiggerPockets. Do a few searches in the forums and you will be able to identify who knows about this topic and can assist you.