I need advise from investors who have had their SD Retirement accounts set up for a while. I have one major hurdle that I can't seem to get past.
In our Fix and Flip business (in a non retirement owned LLC) we utilize a big box home improvement store accounts receivable credit account (LAR Account) to order and conduct business. It works awesome for our business (ordering, delivering, etc) and is super efficient.
How can I use this process with my SD Retirement Accounts?
I am worried that by opening up a credit account at that same home improvement store in the name of the solo401k Plan or IRA LLC it would trigger a prohibited transaction. I am right??
I believe I have found my way around this issue for general use credit cards (by simply ordering a debit card linked to the retirement account and using that over the phone etc), but I can't seem to figure the home improvement store issue.
One idea I had is have my brother (and business partner) open up the LAR account at the home improvement store in his name and have the retirement plan pay those invoices when they come?...but that sounds and feels odd even if it would qualify.
Any comments would be appreciated. Thanks!
Brandon, because your retirement account does not have any credit history, it will not be able to obtain a credit card without you personally guaranteeing it. Even if your Solo 401k or IRA LLC is offered a credit card or line of credit at the home improvement store, you will be asked to provide personal guarantee. This is not allowed with retirement account and would constitute a prohibited transaction.
You are correct that using debit card that is linked directly to your Solo 401k or IRA LLC account would be a way around. But remember - no credit cards unless it is non-recourse (which will be unrealistic in your situation).
The issue is going to be that the store isn't going to give your IRA an account without a personal guarantee from you. And that's not allowed. IRA credit must be totally non-recourse. Its possible to get that for buying a property, with a large down payment. But I just don't see Home Depot or similar stores giving you a fully non-recourse credit account.
When I set up my IRA LLC the attorney recommended against any sort of credit accounts for that LLC, because of this personal guarantee issue.
Also, you are aware of UBIT, right? If you're doing fix and flips in an IRA, all the profit is going to be subject to the brutal UBIT (unrelated business income tax.) That's 35% once you exceed $11,000 in profits.
Thanks for the info. Sounds like I may be looking for something that may not be possible.
I am aware of the UBIT tax and would like to avoid it if possible. The rehab would be fixing up a home to rent long term (hold for over a year) which would take UBIT off the table.
Sounds like there may not be a way to set up those efficiencies at a home improvement store under a retirement plan account.
Anyone else have any ideas to make the ordering process more efficient for a rehab in a retirement account?
Doing a rehab, renting it for a year and then selling will NOT eliminate UBIT. As for active vs. passive investing in general, its all about intent. If you buy with the intention of selling, your purchase is inventory and UBIT would apply. Even if you end up renting it for a year or more. Conversely, if your intention is to buy and hold but you end up getting an offer that's too good to refuse and you sell UBIT wouldn't come into play. I have had this discussion about IRA properties with an accountant for a deal where we made a loan, the borrower defaulted, and we took it back, finished the rehab and sold. Because our intention was to make a loan, not to do fix and flips, UBIT didn't come into play. Well, not to mention there was a loss on the sale. But we did discuss the situation and the possibility of UBIT.
You could set your IRA up as an IRALLC, get a bank account and get debit cards. The attorney I worked with recommended this route.
If you are looking to fix and flip real estate inside a tax shelter your best bet may be the ROBS 401k/PSP over the solo 401k. Reason being, unlike the solo401k the ROBS 401k/PSP is not subject to UBIT when flipping is performed.
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