How to calculate net of investing personally vs. defined benefit

7 Replies

I've found so much contradicting information online and through the hired professionals that handle my taxes. I am hoping that someone here can provide a more reliable answer. 

I have a well-funded defined benefit pension plan through a company that I own. It is sitting as cash in a checking account. It is well-funded primarily because I wanted to defer taxes the S-corp/I would owe. 

I'm now investing in syndicated multifamily deals and it's been tough understanding if I should be investing personally - which I believe would help offset my company profits via depreciation and also allow me to contribute less to my defined plan. The flipside is that I'd have to pay capital gains when the investment is sold - which I assume can be deferred via the pension plan. 

When I look at debt-financed investments through defined benefit plans, I am getting contradicting information. I've heard that debt-financed real estate investment income from rents and disposition are NOT considered UBTI and, hence not taxable, and I've heard debt-financed real estate income is considered UBTI and that a form 990-T must be filled out to report these. If that's the case, I don't know what the tax rate is for the defined benefit plan. I've also read that investing into an LLP as a partner has different tax implications than other forms of investment.

Needless to say, I'm confused and frustrated. 

Can someone help me understand this using some arbitrary numbers for illustration purposes?

If the pass-through company generates $500,000 profit - I can either contribute $250,000 (or so) to the plan and figure out the remaining $250,000. It'll be expensed or taxed at 40% federal and 10% state leaving me with $125,000 accessible cash and $250,000 cash tied up in pension plan.  

If the $250,000 is invested in debt-financed syndications, how much (if any) of the income will be taxed from rent + capital gains upon selling? Will it differ between LLP vs. other entities the syndicators set up?

Option B.) I don't contribute $250,000 to the pension and instead invest that directly into a syndication. That's not tax-deferred so I'd essentially have $125,000 left to invest with. Will the depreciation offset this against income in future years' income? Is this more or less favorable than option A? 

I do have some personal disposable cash to invest with as well. I'm not sure if I should use that cash or use only the pension's cash.

Please help!! 


Trading capital gains at 20% is better than paying 40 or 50%. I personally would try to do everything you can in a tax free account such as a Roth IRAor 401k. You are paying 40% even if Ubti is required the remaining money goes into the account Tax free. You move that money from forever taxed to never taxed. 

W2 is the worst money

Passive income is 15% better than W2 money

Tax deferred is better yet

Tax free is best-HSAs, Roth’s, and ESAs are my favorites. 

UBTI is taxed at trust rates as well as long term capital gains when appropriate. 

Interview accountants and or tax attorneys until you choose one and then listen to their advice and make your plan. Mitt Romney had a 100 million + Ira listed in his financials. I wonder why? But The NY Times reporter said he was stupid for doing his investments in the Ira. The smart money uses tools it is given. Some people can’t see the end game. Sorry this isn’t an example but you need that from the professional you use and pay. Good luck. 

@Jeff Ju

@Carl Fischer took you as far as possible in general terms, without getting into your personal circumstances. And those are important.

Not sure who your paid professionals were, but you need to consult with someone who is a tax strategist, self-directed IRA expert and a real estate expert. Or maybe with 2-3 of them. You can find at least ten of them among contributors to this forum. Except wait until after 4/15, as tax people are too busy with the IRS deadline now.

@Carl Fischer @Michael Plaks Thank you. I had some calls and the consensus was that the main difference in a passive real estate investment is the capital gain. Through personal funds, I can write off depreciation against rental income and pay 20% capital gain when the property is sold. Through the pension, the rental income and capital gain are both deferred, but capital gain would be taxed under ordinary income (40%+) once I start withdrawing money from the pension. The advice was to use personal funds when possible. I don't know if I agree with this! 

Is there anybody in particular you recommend speaking with who digs deep into personal circumstances and can help make these decisions with me? 

@Jeff Ju

You also need to make sure you understand the difference between tax free like Roth and HSA and tax deferred. 

I will be glad to help offline if you have your accountant or @Michael Plaks on the call as well. 

Don't make it harder than it needs to be. I buy real estate in my Roth IRA and Dont pay any taxes anymore ever-what's wrong with that?

@Carl Fischer Thank you. I'm familiar with deferred vs. tax-free. The only reason I currently use a pension is due to the significant contributions I can make to it ($250,000/year). I would prefer to have my CPA on the call after an initial introductory call but if @Michael Plaks is available and willing, let's do it. 

I appreciate your willingness to help. Hopefully, we'll be able to work together on some long-term planning in the near future. 

@Jeff Ju

I'm not as generous as @Carl Fischer . I'm available for such consultation, but not for free.

I just want to point out one aspect that you may be missing. When you invest in a syndication, thinking about depreciation, losses etc. is pointless. You don't have a say. Whatever they do - you just receive an annual report (K1) that has your share of the numbers. 

Whatever you receive is whatever goes on your tax return. Could be a gain, could be a loss - there is no way to tell in advance. The syndicators will usually give you their forecast, but it's like a weather forecast: it may or may not happen.

Please check with your TPA about the flexibility the DB has.

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