All Forum Posts by: Dmitriy Fomichenko

@Jerry Chilimidos, 

I see that you are self-employed. As such, you qualified for a truly self-directed Solo 401k plan (as long as you don't have any employees working for you). This retirement plan have several advantages of SD IRA and one of them is being exempt from UBIT tax on leveraged real estate. So if you move your IRA assets to 401k, including both rentals - you can finance them in the 401k and be exempt from UBIT. Something to consider!

@Jerry Chilimidos,

Here is a list of lenders who specialize in lending to IRAs and 401Ks:

https://www.biggerpockets.com/member-blogs/2810/50272-list-o...

I don't know where your rentals are located and how they are performing but selling might be an option vs doing cash-out refi.

I would certainly consider option C. You have zero control over the stock market, whereas when you do private lending, you have significantly higher control and contractually guaranteed return on your money. And as I explained earlier, your investment is protected by real property, so your risk is extremely low. 

Option D: you are considered a "disqualified person" to your IRA and as such are prohibited from engaging in any transaction in an IRA or receiving any benefits from the IRA (directly or indirectly), therefore I strongly suggest you avoid this option if you wish to stay out of trouble.

Here is some clarification:

When property inside of an IRA is financed, it generates UDFI (Unrelated Debt-Financed Income), the income derived from the leveraged portion of the property.

UDFI is subject to UBIT (Unrelated Business Income Tax). 

This tax is assessed on business income inside of tax-exempt entities or organizations (IRA falls into this category). An example would be owning a franchise. As explained above, income from the financed portion of the property in an IRA would be taxed as well, but you can deduct related expenses, including depreciation, to minimize this tax liability; that is why I recommend a discussion with a tax expert to understand what your numbers would look like.

Hope this helps!  

@Jerry Chilimidos,

Ned is correct, if you end up refinancing your rentals in the IRA - your IRA will be subject to UBIT tax on leveraged portion of the income so be sure to run the numbers with you CPA to understand the tax implications.

Private lending from an IRA is a thing! Private lending using retirement funds is my personal favorite (I've done a few dozen loans like this) for the following reasons: passive, low risk, and high returns. If you do your due diligence before you invest, it is almost impossible to lose money. I've done a couple of direct loans, but for the most part, I work with a mortgage broker who brings deals to me. Feel free to PM me if you want an introduction.

@Brad Kanouse,

I believe this is a duplicate of this post:
https://www.biggerpockets.com/forums/311/topics/1210256-usin...

But regardless, here is my answer:

If you take a distribution from an IRA - it will be subject to taxes and penalties.

You can convert your IRA into a "Self-directed IRA" and have the IRA buy the property, in this case you are not the owner, the IRA is. You won't be able to use conventional financing and must use a non-recourse loan which typically require 40% down. Also be aware of Unrelated Business Income Tax (or UBIT) on leveraged real estate inside of an IRA.

Or better yet, since you are self-employed - go with a truly self-directed Solo 401k plan, which would be a much better option and will help you avoid the UBIT on this investment.

@Brad Kanouse,

If you take a distribution from an IRA - it will be subject to taxes and penalties.

You can convert your IRA into a "Self-directed IRA" and have the IRA buy the property, in this case you are not the owner, the IRA is. You won't be able to use conventional financing and must use a non-recourse loan which typically require 40% down. Also be aware of Unrelated Business Income Tax (or UBIT) on leveraged real estate inside of an IRA.

Or better yet, since you are self-employed - go with a truly self-directed Solo 401k plan, which would be a much better option and will help you avoid the UBIT on this investment. 

This is advice for the readers: DO NOT buy real estate jointly with your IRA. This is just one example of many things that could go wrong when a "disqualified person" is involved in the transaction with the IRA. In the worst-case scenario, your entire IRA can be considered distributed.

The property can still be financed; you need a non-recourse loan. Using a private lender would probably be the best and easiest option in this scenario. 

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@Denice Contreras, most people turn to real estate for cash flow and appreciation. Unlike the stock market, you can also use leverage, which could significantly increase your ROI.

The bottom line is that you can get better returns investing in alternatives (real estate or otherwise) and more control investing in real estate (you have zero control over the stock market). You are investing in tangible assets that will not disappear or lose their value like stocks could. 

The question about depreciation is completely irrelevant here. What you need to ask yourself is whether you should leave your IRA investments in the stock market or invest in alternative assets. If you have more faith in stocks - stay where you are. Otherwise, SD IRA can be the tool for you to accomplish your goals.

The IRA custodian doesn't define what you can and can't do. The IRS sets the rules, and they are available on their website:

https://www.irs.gov/retirement-plans/plan-participant-employ...