Which is the best scenario??

Question

Hello, I am looking for some help to be able to figure out which approach is the most tax efficient approach.

Here is the scenario...

I have 300,000 dollars which I am going to spend on a Duplex.  I am  planning on renting the duplex for 2800(which includes both units).  I  am planning to buy this unit with cash.  I plan on holding this unit for  7 years at which time I want to sell it.

Assumption:  I can use PreTax money or I can use PostTax money.

Question:  What would be the most tax efficient strategy for me to use?

1.  Use a SD IRA to buy the property?

2.  Use a Solo 401K to buy the property?

3.  Use after tax money to buy the property?

Justin Windham · Answer

Account Closed

A Solo 401k requires 2 things for someone to be able to set up one of these plans:

1. The presence of a business or some self-employment activity.

2. The absence of any full time non-owner employees in any business that you own.

These 2 items are the eligibility requirements for a Solo 401k.

Brian Eastman · Answer

Account Closed

Your question is not one that can be answered here on the forum with the information provided.  To correctly evaluate such an option, one would need to know your tax rate, expected expense ratio on the property, goals for income usage personally either after-tax or when and how you plan to take retirement plan distributions, etc.

I can state that since you are looking to pay all cash, there is effectively no difference between the IRA and 401k options.  A 401k would not be subject to UDFI taxation if you were using leverage, while an IRA would, so there would be a difference in that scenario, but not your's as stated.

Justin Windham · Answer

Account Closed

As far as the retirement structures go, the Solo 401k will offer the most potential tax advantages. Though if you do not intend to use financing for the duplex purchase, a SD IRA will likely provide the same tax benefit on this transaction. There are other factors to consider as well, such as Solo 401k eligibility, whether your post tax money is now in a Roth IRA (which cannot be transferred to a Solo 401k), etc.

Account Closed · Answer

@Brian Eastman, thank you Brian!  Would you have a few moments were we could chat on the phone, I can provide that detail but not sure I want to put it on the ....net....

Account Closed · Answer

@Justin Windham, thank you!  I don't plan on using financing at this time was planning on buying it outright.  I am not sure what you mean about Solo 401K eligibility, could you detail that out a bit for me please?  The after tax money is all cash in a savings account, not a Roth or anything like that.