All Forum Posts by: Doreen Chaisson

Most Self-Directed IRA investors fund their Self-Directed IRAs by transferring cash from other IRAs, or rolling over old 401(k)s from previous employers. As someone stated, relying on annual contributions alone could take you quite some time to build up enough cash to invest in RE. The IRA can mortgage the property - the IRA actually takes out the non-recourse loan and must pay the monthly mortgage payments. If this is an income producing property, using leverage to purchase the property will kick off a tax called UBIT - Unrelated Business Income Tax. Very roughly, the percentage of the income that is equal to the percentage of indebtedness will be subject to this tax. There are certain exemptions and it's a complex calculation you'll have to get a CPA to assist you with. This tax must be paid with IRA funds.

Many non-recourse lenders who will lend to IRAs require a pretty hefty down payment from the IRA (30 - 50%) and will also require that the IRA has a certain level of cash in reserve that would cover mortgage payments in the event tenants move out or other reason that would cause income from the rental to stop. They have restrictions on the types of property they will lend on - generally it must be income-producing. Most won't lend on raw land, mobile homes, and certain other property types.

This is correct - if the date of the sale of the IRA-owned property is at least one year and one day after the IRA's mortgage debt is paid off, there is no tax on the gain.

If your cash flow is neutral or negative, there would be no income to pay UBIT on.   UBIT is due on the UDFI  - unrelated debt-financed income - generated by a property (the portion of income attributable to the debt).  The first $1,000 of income generated is exempt.  If, after all deductions, your net income is $0 or less, you would have no UBIT due.

This would depend on how the property is deeded/divided. Some Duplexes are considered one property (one home with a rental unit). It's taxed as a single building. In this case, if you and your wife are living on one side, your wife's IRA $ would not be able to be involved in the purchase. That would be self-dealing. If the property is divided, with each half of the duplex deeded as a separate property, like a condex, taxed separately, separate tax lots, etc, then your wife's IRA MAY be able to be involved in the purchase of that half of the building. All expenses for that half of the condex would come from her IRA, all income would flow to the IRA. However, there are many things to be aware of with this type of situation: If your wife's IRA owns the other half of the duplex, you will not be able to do any maintenance, nor use that part of the yard for your own personal use, and so forth. If there are any shared utilities or other items (example, a shared driveway, lawn, septic tank or well that needs maintenance, plowing or other upkeep), this creates another set of issues that could be perceived as self-dealing. To avoid prohibited transactions entirely, it's probably best to look for a completely separate rental property that you and your wife will not have any personal involvement in.

With respect to the RE crowdfunding question:  Do your due diligence on the crowdfunding portal you're working with.  See if they are backed by a licensed broker-dealer. If they are, then that means they have done the vetting of the underlying investment, and in offering it, are putting their professional license and reputation on the line.  That should give you some level of comfort.

Generally this type of investment will be into a company that develops Real Estate, so it'll be a private equity investment and not a RE investment. Not all crowdfunding companies will accept IRA monies - you'll have to call and do your research.

As far as mixing asset types within one Self-Directed IRA, this is perfectly acceptable.

There are many Self-Directed IRA custodians out there. It is advisable to do your due diligence and ask about such things as how long have they been in business, are alternative assets their sole focus, are they BBB accredited and rated, are they a regulated financial institution, have they ever been sanctioned by any regulatory bodies, how many accounts and how much in assets do they administer?

Additionally, there are many different companies to choose from when deciding which IRA provider will help you invest your retirement funds into real estate. What often gets overlooked is the type of company you are choosing. IRA providers can be put into three separate categories: Custodians, Administrators, and Facilitators.

Custodians are the first type of company, and are usually the most common. They're either a bank, credit union, or non-bank custodian approved by the IRS (usually a broker dealer who obtains IRA approval). Custodians are permitted to custody assets held in an IRA under IRC Section 408. They're also subject to strict regulatory oversight at a State or Federal level. Custodians tend to take a more conservative approach when reviewing alternative assets for investment, as they want to avoid the custody of any assets that may be involved in prohibited transactions. Alternative Asset custodians cannot give any tax, legal or investment advice, cannot assist with the structure of an investment, and cannot endorse, promote or align with specific investment sponsors.

Administrators are the next type of company. Essentially anyone can be an administrator, and their main function is to perform administrative functions only. Because of this, they also need to have an identified custodian for the self-directed IRA named in the account disclosure documents. Administrators are only subject to regulation if required due to profession (CPA or attorney), not for role as administrator. This allows administrators to be much more liberal in accepting assets and allows the ability to align with investment sponsors. Review fee schedules carefully – there may be separate charges for whatever 3rd party custodian they are using.

The third company type is a Facilitator. They educate investors on the process of self-directed investing or assist in setting up single-member LLCs for either "check-book control" or to purchase a franchise or ROBS (Roll-Over Business Startup). They may also provide administrative services for the LLC. Like Administrators, Facilitators must have an identified custodian for the self-directed IRA and are only subject to oversight on a professional level. They are also much more liberal in accepting assets and can align with investment sponsors. Again, review fee schedules carefully – there may be separate charges for whatever 3rd party custodian and/or administrator they are using.

So when you're looking for someone who offers a self-directed IRA, make sure you know the type of company you're dealing with. This will help when determining which company best fits your investment scenario.

I have never heard of this rule, and it's certainly not one we have at our SD IRA custodial company. You can open your SD IRA at any point, just as long as it is funded prior to investment date. You want to be sure your funds are transferred to your new SDIRA form your current IRA/retirement plan custodian in time for an earnest money deposit to be sent out, as you cannot user personal funds for this. If you're currently shopping around for an investment property for your SDIRA, it's better to open & fund sooner rather than later so you can be ready to make a move when you find the right property.

No, an IRA owner cannot personally guarantee a loan on behalf of the IRA. If an IRA needs a loan, it must be a non-recourse loan.

As I said, custodians do not get involved with UBIT calculations. When UBIT tax calculations and tax bills are presented to us for payment, we send the tax payment out of the IRA. It is the responsibility of the IRA owner and his or her attorney/CPA to be sure they are not running afoul of any IRS regulations.

Hence my use of the word "may" - as a passive SD IRA custodian and administrator, we always encourage our clients to seek the counsel of a qualified attorney and/or CPA before engaging in any transaction with their Self-Directed IRA. Based on my 14 years' experience, we have not seen anyone rehabbing 1 - 2 properties per year pay UBIT tax. However, and again, the calculation of UBIT tax is not the responsibility of the SD IRA custodian.  I was merely trying to correct some misinformation on this threat about UBIT always applying, about funneling income out of the IRA, and about LLCs being required.  I apologize if my comments added any confusion.

Any income derived by an IRA-owned asset must flow back to the IRA. If you purchase the property outright with IRA funds, rehab it with IRA funds and then sell it at a profit, ALL proceeds from the sale flow back to the IRA. Your IRA can do this process directly or insert a single member LLC, but it is not a requirement and makes no difference in the prohibited transaction rules.

With regard to UBIT - this may not always apply. If your IRA leverages the purchase and rehab of the property, it definitely will. If you purchase it outright with your IRA and rehab it with IRA funds, and only rehab one or two properties per year, you may not owe any UBIT if there's no leverage. Each state has regulations on when an IRA account that is buying/flipping reaches "dealer status" (usually more than a handful of transactions per year, check with your own state) at which point it is no longer involved in passive investing, but will be considered a real estate operating company, subject to UBIT whether or not there is leverage in the picture.

Shop around for a good custodian who knows the regulations. There are many Self-Directed IRA custodians out there. It is advisable to do your due diligence and ask about such things as how long have they been in business, are alternative assets their sole focus, are they BBB accredited and rated, are they a regulated financial institution, have they ever been sanctioned by any regulatory bodies, how many accounts and how much in assets do they administer?