Self-Employed/Independent Contractor Loophole??

Question

Greetings!! I am brand new...literally a week into this game and I came across my first snag.  I am an independent contractor and I am only 3 months in but within the same previous industry that I have been in for 10 years.  My husband is employed and in the same job for the last 12 years.

We want to purchase our first multifamily investment in 2018. Here is the challenge. Our lender informed us that he would have to get the loan in his name because of my employment status. But my concern is that most of the funds were coming from me. I am pulling a portion of an IRA and I only have access to it because I recently switched jobs.

Are there any loopholes?? Can I start putting money in his accounts for the next few months or something?? Would that help?? If I am a silent partner doesn't he have to show all of the funds??

Next question, we have a business and we want to start putting our properties under our business name.  Should I instead start adding funding to the business account??

Basically, where does all of the money need to sit in order for this transaction to go thru and how long do the funds need to sit in the account.

Any tips, loopholes??  Please share.

Thanks in advance!!

Charlotte

Charlotte Brathwaite · Answer

OK thank you both!! Very very helpful information. @Dmitriy Fomichenko @george blower

George Blower · Answer

@Charlotte Brathwaite

If you are self-employed, you could transfer the IRA to a solo 401k plan and then process a solo 401k participant loan.

See the following for more on this.

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-loans

You will be able to borrow 50% of you solo 401k funds not to exceed $50,000. Because it is considered a loan, it will not be deemed a taxable distribution.

• The maximum Solo 401k loan amount is either 50% of account balance or maximum amount of $50K.

– Example 1: Solo 401k balance is $50K; 50% of $50K = $25K (the Solo 401k maximum loan amount)

– Example 2: Solo 401k balance is $150K; 50% of $150K = $75K; however, the maximum permitted Solo 401k loan amount is $50K

– The minimum Solo 401k loan amount is $1,000.

Dmitriy Fomichenko · Answer

Charlotte, if you take a distribution from your IRA in order to buy the property personally, this will be taxable event. Also if you are taking distribution prior to normal retirement age you will have to pay the penalties. If that is what you want to do be sure to consult with your tax advisor to understand the tax implications.

If you wish to buy this property inside of your IRA this is possible, but as I mentioned earlier you need to setup self-directed IRA first and move funds from your existing IRA. You will not be able to do so with your current custodian, they do not allow alternative investments.

You must remember that as "disqualified person" you personally (or your immediate family members) can't engage in any transaction with your IRA, this will trigger prohibited transaction according to the IRS rules:

https://www.irs.gov/retirement-plans/plan-particip...

Charlotte Brathwaite · Answer

OK thank you.  So I need to check to see if it a self-directed IRA.  But how can this work if I am the silent partner with the funds?

George Blower · Answer

@Charlotte Brathwaite

In that case it is probably not a self-directed IRA. If you want to invest it in real estate, you would need to transfer it to a self-directed IRA offered by a custodian like IRA Services Trust Company.

Here are some of the rules that will apply when investing a self-directed IRA in real estate:

1. The property will be owned by the IRA.

2. You cannot perform any sweat equity functions on the IRA owned property.

3. The income and expenses will flow through the IRA.

Bottom line, you will want to speak with competent attorney/CPA regarding your options so that you understand the ongoing rules as well.

George Blower · Answer

@Charlotte Brathwaite

Did you invest the funds in an IRA LLC?  If not, and they are held by the IRA custodian, they will require that you fill out their investment directive for the real estate investments and they would be the ones to wire the IRA funds to the seller. Also, the property cannot be used for your personal use because of the prohibited transaction rules. See the following:

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-prohibited-transactions

Charlotte Brathwaite · Answer

Empower Retirement

Dmitriy Fomichenko · Answer

Charlotte, where is your IRA now, who is the custodian?

Charlotte Brathwaite · Answer

Good question.  I want to use the funds to buy the investment property.  When I rolled over my 401k they explained it to me as if they could write a check from my IRA for the amount I needed for the property.  It would be a small portion of the IRA.  Does that make sense?  (Still learning)

Dmitriy Fomichenko · Answer

Charlotte, congratulations on your first post and welcome to BiggerPockets!

When you say "I am pulling funds from an IRA" do you mean you are taking distribution from an IRA and want to use those funds to buy investment property in your name or do you wish to rollover your IRA into self-directed IRA and buy the property inside of your SD IRA?

Self-Employed/Independent Contractor Loophole??

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