Using Self-Directed IRA to fund "Subject to" deal

12 Replies

Hi guys,

I'm poised and ready with checkbook in hand to fund my first self-directed investment. I need 2 things, the confidence that performing a sub-to deal is within the boundaries of an IRA, and also need a contract with the verbiage (I'm in Texas). Anybody that can help me? (Oh, and need to find a deal, but I'm a Realtor and not afraid to knock on a few doors and in the Harvey aftermath)

Thanks for any advice!

Sandy

@Sandy Sawyer

A "subject-to" is used with SDIRAs because it is non-recourse to the IRA. Make sure you don't confuse "subject-to" and "assumed " mortgage. Good luck.

Use the standard Texas contract and make an amendment or have your broker or attorney or title company help you if this is your first "sub-to". 

Thanks Carl; I'm concerned about whether it will incur the UBIT (unrelated business income tax) which can happen if the funds from the investment are not solely from my account, in this case, it would be likened to a loan or a partnership in a venture, no? @Carl Fischer

If your IRA owns a financed rental property you will have UBIT. More specifically, UDFI (unrelated debt financed income). There is an exemption from UBIT for rental properties owned by an IRA that avoids UBIT on the rental income. However, there is an exception to the exemption if you have debt financing. So, the portion of the value of the property (basis) that is debt financed is used to compute a fraction (loan balance / basis) and that fraction of the net rental income is UDFI and subject to UBIT. Taking over someone else loan is still a loan. You definitely want a knowledgable accountant doing taxes for your IRA. Be very careful you do not give any personal guarantee on the loan in any way. That would make this a prohibited transaction.

@Sandy Sawyer

To learn more abut UDFI and UBIT see the following.

https://www.irs.gov/irm/part7/irm_07-027-008

Have you considered other investments such as notes or HML? Have you got advice from your CPA and attorney? Definitely find out BEFORE you make a move. IF you put an asset into a retirement account and then realize you wish you had not done so, I don't believe you can take it out without incurring penalties. You tax guy is the one to help you decide what is best.

Once you put your money in an IRA to avoid a some taxes, the government allows you to use it only if you can navigate the obstacle course of traps and snares they have laid for you. I prefer to give them their cut upfront and move on with my life.

@Sandy Sawyer

You may have UBIT/UDFI but so what it means you are making a good return on your money. If you don't make enough $$$$ or property is used as government housing are 2 reasons you won't pay UDFI. Everybody makes a big deal about UBIT UDFI but complete IRS form 990T and collect the rent. It's not that hard. 

@Sandy Sawyer

Easiest to just assume the existing insurance policy as well.  The lender will already be on it.  If not , the new insurer will ask who the lender is and get them on the policy as the mortgage holder.  Hopefully nothing else surfaces-- it never has on me in the past.

I brought this up at the Big monthly Jet Lending event a couple of months ago. They suggested something about getting the seller to add your name to their insurance as well as theirs. I'm trying to think this through, in the event say, the roof is destroyed in a storm, does the insurance company pay the contractor directly? I'm concerned the bank would be involved in getting the payout as the beneficiary and I'd be stuck with the bill. (I know I think too much!)

Thanks for your input Carl,

Sandy

@Carl Fischer

@Sandy Sawyer generally the check is made payable to you and the bank.  Both have to be satisfied with the work.  Although the insurance company, contractor, you, and the bank can make whatever arrangements you all agree to even before work begins.  I have had properties in Florida for decades and have not had problems even after hurricanes. I like being responsible for hiring the contractor and paying him/her-im a little bit of a control freak. The bank usually asks me if I am satisfied, and sometimes asks for pictures, a copy of permit, or sends an inspector and then the check/money gets deposited into my account. It seems to work out ok in the end.

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