SDIRA

[Robert Farris]

I'm really interested in a Self Directed IRA. So far I'm just trying to understand it all being I'm new to real estate investing.

My question is, can I convert my 401A, 403B from my current employer that I'm fully vested in to a SDIRA?

Anybody in Southeast Michigan or surrounding area using an SDIRA that wouldn't mind talking with me about this?

[Mark Nolan]

@Ben Freeburg

See the following regarding prohibited transactions. 

https://www.irs.gov/irm/part4/irm_04-072-011.html

[Ben Freeburg]

@Brian Eastman wow, thanks for the quick reply!

Hmm, we need the leverage/mortgage to buy the property.  We were hoping to combine the dollars in our IRAs for the down payment on that property.  Let's call the property $200k and we need 30% down so we use $60k from our IRAs for the down payment.  Maybe my question is then: what's the best and simplest way to structure this?  

@Mark Nolan thanks for the IRS link!  fascinating reading! : )

[Brian Eastman]

@Ben Freeburg

The IRA accounts could form a new LLC specifically for this property, where each of the IRA accounts is a member. You and your associate could be non-owner managers and administer the LLC. The LLC would be the borrower on a non-recourse mortgage, and the IRA's would have exposure to UDFI taxation. The LLC would have a single bank account for handling the investment. The LLC would need to file a partnership return at the state and federal levels. The feds would recognize the IRA ownership and no tax on income would be expected (other than the separate UDFI tax at the IRA level). Not all states follow the federal model, and may want to tax the partnership regardless of the fact that the partners are IRA accounts. Check with your licensed tax advisor familiar with the laws of your state.

Alternately, the two IRA accounts could simply vest title to the property as tenants-in-common. The IRA accounts would then be join borrowers on the note.

This will be more complex at the day-to-day level, but will eliminate some of the tax reporting requirements that would come with a LLC. Of course, the LLC will also provide a layer of liability protection to the IRA accounts they would not have with a direct investment.

If you intend to make multiple investments, a better approach would be for each of you to establish your own self-directed IRA LLC. These single-member LLC entities would not have tax filing requirements at the state or federal level. The two LLC entities could then join-venture into various properties. This would give you much more transaction control than working directly through the custodian, but also provide more flexibility for multiple deals - some of which may be with other partners, or at different equity splits than the first property.

[Mark Nolan]

@Ben Freeburg

Here is another option. 

If you and your partner are both self employed in the same business, you can open a solo 401(k) plan under the partnership. 

You can both participate in the same solo 401(k) plan; therefore, you can transfer your respective IRAs to the solo 401(k) plan and invest in real estate. 

If you proceeded in this fashion, the solo 401(k) can obtain a non-recourse loan and it will not subject the solo 401k to UDFI. UDFI does not generally apply to solo 401k plans but does to IRAs. This is one of the main differences between an IRA and a solo 401k plan.

[Ben Freeburg]

Thanks @Mark Nolan @Brian Eastman  those are great ideas.  I'll have to do more research for sure!  Lots to think about.

[Minna Nah]

Be sure to use a CPA knowledgeable with real estate investing using IRA to guide your through UDFI

[Ben Freeburg]

HI All, Is there a way to do this if my IRA only owns 49% of an entity? So my IRA owns 49%, my partner's IRA owns 49% and another investor owns 2%? Does this get us past the self dealing? My thought is to buy an investment property with my IRA but then have some other interested entities be involved (prop mgmt, etc) so I run into some self dealing issues. And my prop mgmt company is required for this to be a good deal. Does this work? Thanks!

[Brian Eastman]

@Ben Freeburg

Simply put, either your IRA or your property management company participates, but not both.

If you try to use your property management company where your IRA is the owner, you will certainly be creating some kind of direct or indirect benefit between the plan and a disqualified party. There is no "workaround".

[Ben Freeburg]

Thanks @Brian Eastman!  I'm still learning!

[Brendan Harrison]

Does anyone have any recommendations for CPA's in Washington State that are up to speed on Self Directed IRA's? I am also curious about Solo 401K usage @Minna Nah. 

Specifically, if you are to utilize a solo 401K, does your business have to be your sole source of income? If I have a 9-5 job, could I start a 401K for my real estate business, contribute to that, then convert some of my IRA to an SDIRA and then dump it into my solo 401K for my real estate company?

Good thread here guys!  Thanks for the great info @Mark Nolan & @Brian Eastman!

Brendan

[Brendan Harrison]

One other SDIRA question I came across:

If I am only 49% owner of a company, can I then use my SDIRA to invest in that same company?  Would that keep me from being disqualified? 

Thanks again!

[Kevin Moen]

@Brendan Harrison I have a saavy CPA, I just established my SD IRA so he hasn't done my books since establishing, but he knows real estate and business. He's located in Bellevue and if you message me I can get you his contract info. You could at least pick his knowledge on your questions above.

Secondly no, you cannot use SD IRA funds to invest in a company you have ownership of.

[Dmitriy Fomichenko]

@Brendan Harrison To have a Solo 401k, you need to have a self employed business activity, but it doesn't have to be your sole income. You can have a full time job (with a regular 401k with an employer), and a side business with a Solo 401k. However, you can only contribute to the Solo 401k with income from a business. Your 9-5 income, for example, cannot be contributed to the Solo 401k. If you have an old 401k from a previous job, or an IRA, however, you can rollover the fund into the Solo 401k.

[Justin Windham]

@Brendan Harrison

Even if your ownership of a company was small enough for that company to technically avoid being a disqualified person to your IRA, it could still be a prohibited transaction. What you describe would likely be seen as "self-dealing" and thus, prohibited.