Is it worth buying real estate through your SDIRA?

Phoenix, AZ · Member since 2016 · 6 posts · 3 votes

HI Everyone...

Just joined BP - I've been reading the forums for 1 month. Lots of great information. Thanks to everyone who is sharing their knowledge.

I am debating whether it is worth using my SD IRA to purchase real estate or is it better to use those funds for deed of trust investing or other avenues of investments.

I will not be able to access any rental income from the SD IRA until retirement, and since all gains in the SDIRA are not taxed - I will not be taking any advantage of depreciation or other tax benefits that I would investing with non retirement money.

Is there a pro / con list that can help me decide? Thanks

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Dmitriy Fomichenko

Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes

10y

Originally posted by @David Dachtera:

@Sameet Koppikar,

Something to consider...

If you do, say, a fix-and-flip using your SDIRA, once the repairs are complete (enough), you can get a new appraisal and refinance to pay back your SDIRA with interest, as well as any other investors. Any excess becomes an advance on your profit when you sell, and the profit is then legally yours as the SDIRA has already been paid back. At that point, you selling and taking a profit is no longer a prohibited transaction.

If you are doing fixer upper in your IRA, most likely you will not be able to use a new appraised value to refinance the property. Most lender will require seasoning, as much as 3 years before they can use new appraised value. Until then the purchase price is used as the value of the property when you want to finance it.

When you sell the property owned by the IRA - the profit is not yours, the profit belongs to an IRA. You can not touch any of that. If you do pull any funds out - it would be considered a distribution, which is a taxable event and if this happens before retirement age penalties would also apply.

In addition that that, flipping activity may be considered an active business, and profit might be subject to Unrelated Business Income Tax.

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David Dachtera
Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
10y
Originally posted by @Dmitriy Fomichenko:
@David Dachtera
when you say "corporation not owned by any human person" what do you mean. Who owns the corporation? What is the relationship of the IRA owner to this corporation?
In your earlier post you say "Any excess becomes an advance on your profit when you sell, and the profit is then legally yours as the SDIRA has already been paid back."
This indicates that IRA account owner is indirect owner of the entity you are referring to, is my understanding correct?
The corporation is owned by a trust and one or more LLCs which are owned by the corporation and the trust. There is no human-person ownership anywhere in the business entity structure.
The IRA owner is irrelevant in this scenario.
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David Dachtera
Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
10y
@Jason V.,
Yes, you're actually better off using an S-Corp (avoid double taxation).
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David Dachtera
Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
10y
@Brian Eastman,
Not sure what a "blocker corporation" would be, but I can ask.
Our tax and legal expert will be in town near the end of September. He's doing Friday, Sept 23rd from 3pm to 6:30 pm on QuickBooks for your REI Business, and all day Saturday on Tax and Legal for Entrepreneurs and REIs.
Doing REI without legal counsel is ill-advised and not recommended. If you're going to have legal help anyway, why settle? Go for the gold.
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Brian EastmanPro Member
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
10y
@David Dachtera
I understand what you have, and it is a nicely sophisticated tool for pooling several sources of capital and engaging in flip transactions at a lower tax rate than an IRA would directly.
What you have is not really a self-directed IRA investing in real estate, but rather a self-directed IRA investing in shares of a complex legal structure that invests in real estate. That legal structure changes some of the tax interactions, because the C-Corp is taxed and the IRA receives dividends.
I guess my point, and why I jumped into this thread based on your first comment is that your situation is quite different from what most investors would consider a self-directed IRA investing in real estate. As a result, real caution needs to be exercised here on BP. To someone new to the topic, some of the statements you have made are confusing at best and potentially quite misleading.
I'm sure that is not your intent and appreciate the many contributions you have made to various discussions here on BP.
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David Dachtera
Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
10y
@Brian Eastman,
Don't get too hung up on taxes. Remember: businesses get taxed on revenue left over after expenses where W2s get taxed before expenditures.
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Kris Reeves
Investor · Trussville, AL · Member since 2015 · 50 posts · 19 votes
10y
This thread, along with the back and forth debates, is extremely helpful, as I have just moved one of my IRAs over to a SD IRA to begin using it to invest in real estate. I am almost finished with a great book, "The Self Directed IRA Handbook" by Mat Sorensen, who is an attorney, and has been a great resource thus far for educating me on the dos and don'ts of SD IRAs. Thanks guys, and keep the debate going!
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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
10y
Everyone can say what they think on here but before anyone goes around messing with retirement funds they might want to pay for a legal opinion letter.
This way if an issue comes up there might be some kind of recourse for a party giving misinformation.
Talk is cheap and people tend to change or manipulate what they said in the past to "cover their $ss". When you have word for word in writing with a signed and notarized statement versus verbal the protection level tends to be higher.
Anything open to interpretation can be challenged by the IRS down the line and people should have a strong defense to prove what they have been doing is allowed and correct.
No legal advice given.
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John Thedford
Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
10y
I don't believe in holding RE inside of a retirement plan. I am NOT a tax guy or attorney. I know holding RE inside a retirement plan has been debated many times on BP.
If you hold RE inside of a retirement account you lose:
1. depreciation (a tax write off every year)
2. ability to write off expenses (taxes, insurance, maintenance)
3. ability to sell tax deferred (1031)
You gain:
All gross income is non taxable until it is withdrawn
Tax experts: please correct me if I am wrong and also tell me what i overlooked.

What WOULD I do with a self directed plan?
Private lending. I chose this route 4 years ago. The returns have been WAY above stock market averages, they have been steady, and I have seen my retirement account grow quite well. In some instances the annual ROI has exceeded 30% on some of these investments.
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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
10y
I have also found with investors who have approached me to buy directly that the loan has to be non-recourse with retirement funds. I find banks make the interest rates in the 5's for that and so it eats into your returns.
Personally I do not care about money 30 years from now with retirement. I plan on having so much money coming in from properties with depreciation and a real estate professional status that it won;t matter.
It's kind of like life insurance policies. Once you accumulate so much wealth you don't really need one as you already have a bunch of money.
The IRA I have seen most people lend out of it versus own.
Everyone has a personal opinion on things so don't take mine as the gospel.
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John Thedford
Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
10y
@Joel Owens
Reverend Joel...we DO take your posts as gospel...:)
This thread is getting long and many things rehashed over and over...
Most people I know lend from their retirement accounts as well and hold real estate outside of that to maximize tax advantages and have cash flow every month. I suggest everyone should get competent tax advice as well as legal advice. Know what you are doing before you make the move.
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Chris Martin
Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
10y
@Sameet Koppikar see also because I was asking the same question.
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David Dachtera
Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
10y
@Kris Reeves,
Yes - Matt Sorensen is the law firm partner of my group's tax and legal expert, Mark Kohler.
@Joel Owens, my group's tax and legal expert devotes a good deal of his time training IRS agents in the proper interpretation of the tax code, especially in the past five years dealing with an audit of one of my group's leaders (Mark & Co. won the audit, of course!). What the IRS doesn't know about their own tax code would make you burst out the door and run screaming into the night!
@John Thedford, that's exactly what I've been describing: your SDIRA as a funding source, NOT a "holding company". The returns are MUCH better than Wall Street AND MUCH safer!
1 Reply
Cindi Anderson
Investor · Sun Valley, ID · Member since 2015 · 16 posts · 0 votes
10y
I think it's too complicated for typical residential RE. But I did it with a commercial building and I think it is great for that. The building is absolute NNN (I do nothing) with a long lease and I get the funds (equal to 7% of my purpose price) direct deposited into my checking every month. The tenant is huge so there is little default risk. And they are currently in process or doing a complete remodel to the building all at their cost and while still paying me rent.
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Sameet Koppikar
OP
Phoenix, AZ · Member since 2016 · 6 posts · 3 votes
10y
Thanks for the debate. Fascinating topic. I thought I knew what to do ... Now I'm debating...
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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
10y
So at what point is an IRA not needed then?
If you make 500,700, 1 million a year income and plow that money into investments and take depreciation with a real estate professional status then putting 30k a year into an IRA doesn't seem to be that great of a thing to me.
It seems if you are worth 10,15,20 million by the time you retire then why would you need an IRA? You have all the depreciation you want and just get non-recourse loans on your properties.
I am not an expert on these. Am I missing something? Maybe these are optimal for certain income brackets like sub 100k a year?
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Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
10y
@David Dachtera do you personally have a transaction(s) that is structured like this or is this something that you have been taught?
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David Dachtera
Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
10y
@Mike Dymski,
I personally do not. The people in my investing group do it every day.
If you'd like to meet the man we all learn it from - the instructor of our tax and legal class, he will be here the 23rd and 24th of September. Friday, the 23rd, he will be presenting on using QuickBooks in your REI business. Saturday the 24th, he will be going over tax and legal strategies for tax advantages, asset protection and estate planning. He's a JD/CPA tax attorney / accountant, nationally known speaker and author, and partner in his law firm.
Suburban Chicago would be a road trip from Greenville, but if you'd like to attend, let me know. You'd be able to get all your questions answered. The workshop will be webcast, also, so your Q & A will be seen / heard by a nationwide audience.
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Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
10y
@Joel Owens
congratulations on your success! But I think that while many BP members may have similar goals of earning $500,000-$1MM/yr in income - the reality is that most will not be able to get there as quickly as you did (or get there at all). Most investors want to use REI as a tool to secure their retirement (financially) and using self-directed IRA/401k can be a great tool to help them get there.
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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
10y
Thanks Dmitriy.
So based on your research do those with 5,10 million etc. still have an IRA or do you find they bypass it all together?
The PFS statements I see with clients they either have a small one or not at all.
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Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
10y
@Joel Owens
the service I provide (self-directed Solo 401k plans) is a niche service and most of those investors who contact me are not there yet and the reason they come to me because they can benefit from this vehicle.
But I totally understand your point. One client actually comes to mind who terminated his plan couple years ago because he was on track for the income you were referring to in your earlier example and retirement account was of little benefit to him.
The bottom line is that financial and investment planning is not one size fits all and must be done individually, based on what is best for one's particular situation.
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Elizabeth Goff
Investor · Napa, CA · Member since 2016 · 101 posts · 53 votes
10y
@Dmitriy Fomichenko Can a self-directed solo 401k be used for investment in crowd funding sites like Realty Shares or Patch of Land?
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Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
10y
@Elizabeth Goff
Yes, you can invest in crowdfunding using self-directed Solo 401k.
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Mark Nolan
Professional · Carlsbad, CA · Member since 2012 · 12k+ posts · 1k+ votes
10y
@Elizabeth Goff
Not all crowd funding providers will accept self-directed solo 401k funds. Lending Club is one of them.
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Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
10y
@Elizabeth Goff Lending Club and Prosper allow it and one of the best parts is that they pay your self-directed account fees at certain levels and if you use their preferred custodians. So, if consumer loans are part of your strategy, you can invest in them out of your self-directed account along with other non-LC and Prosper investments out of the same self-directed account with no fees. Idle cash from non-LC and Prosper investments can be quickly directed into LC and Prosper accounts as well so that your returns are not reduced as that cash sits idle. Self-directed account fees and small amounts of idle cash are not huge expenses but they add up over time and across multiple accounts and this is one solution around them.
On a side note, well done for the custodians on this post. I see your feedback whenever your field is addressed and it is always very helpful to members....nicely done.
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