I'm looking to start a SD IRA checkbook LLC. I've got retirement accounts to fund it and start investing immediately.
I was talking to a CPA about investing in their Private Equity fund.. When I told him I wanted to us SD IRA money he said it wasn't a good investment for me. He said I have to pay UDFI tax on the leveraged amount. That would reduce the return too much. I heard about UBIT/UDIF taxes but didn't think they were that significant. I think most real estate investments should have some leverage. They talk about SD IRA investments for real estate a lot but is that for younger investors who haven't built their accounts up yet?
Any SD IRA investors dealing with this? Or anyone else got some feedback? I'd hate to put in index and bond funds. I sleep better with real estate as rents rarely go down.
Did the CPA help you run the numbers and see what the impact of UDFI taxation on the leveraged gains would be?
Sometimes when a "fund" is using leverage, your returns are diluted to the point where UDFI diminishes the ROI to the point of making the opportunity less than stellar.
The direct use of leverage into a single property held by the IRA would likely work out a lot better. For most investors, the impact of the taxation is minimal, and the IRA will see the significant part of additional cash-on-cash return that leverage produces.
Being the bank and lending the IRA money to other investors is another option that can produce consistent returns and does not have any UBIT/UDFI exposure.
There is a book called Leverage Your IRA by Matthew Allen. iralending.com In the book he provides comparisons of investing in RE within and outside of IRA funds.
This should help answer your questions.
@George Blower would you consider a multi family syndication a business that would trigger UBIT if a passive investor used their solo 401k to invest in that deal? ...and same question, but now also if the lead sponsors used a recourse loan instead of non recourse?
@George Ozoude A Solo 401(k) receiving income from rental of property should not have tax implications. Whether the GP has a personal guarantee or not on the loan has no bearing. As a limited partner, your Solo 401(k) cannot have a personal guarantee associated with you as that would violate IRS rules (by you pledging your assets for the plan's debt). It would be very unusual for a limited partner to be on a guarantee for a note in such a situation.
@Brian Eastman thanks a lot for the clarification
As a syndication and private placement investor I do not like sdiras at all.
You are subject to UDFI and cannot leverage your investment (unless it is higher interest rate and lower LTV non recourse) which is a pillar in real estate investing.
If you have distrust on where this country is going you need to expect that taxes will go up in the future. How else will we pay out for all these bank bailouts and quantitative easing.
You will pay taxes now or later and you will likely to pay more taxes in the future because you will make more money... so pay it now. Most people think they will be in a lower tax bracket in the future because they plan to downgrade their lifestyle... this is again incorrect money myths that are so prevalent.
Caveat: If you are late to the game and already have a 401k over $100,000 then you should convert it to a solo401k. At that point, you should think about putting it into a syndication since you are restricted on how you can leverage it.
see these posts are really old....hoping someone in the know picks this up.
I have a SDIRA and own a number of properties under it. Took out a Non-recourse loan to bridge the period of time it was taking to transfer funds into the SDIRA. The loan was for the total amount including settlement. I paid off the loan in a matter of weeks. How do I calculate the investment percentage? Is it the total loan amount divided by 52 weeks x the number of weeks of the loan? Can't seem to get my mind around this calculation.
The simple answer is that you hire a CPA and let them deal with the details.
What is taxed is debt-financed income. It is quite possible you do not have net taxable income in the period of time that the debt was in place once you factor in exemptions and deductions.