All Forum Posts by: Daniel Dietz

@Jim 

@Jim Workman I use UDirect (as do my two partners in our 3 way LLC) and we set things up with 'local checkbook control' at our local community bank. This is for buy and hold rentals.

Would there be any reason not to go this way with what you are trying to do? It seems like it would make the whole process simpler for you.

Dan Dietz

Hello BP Members,

So far I have been doing my Buy-n-Hold investing inside of my SDIRA so have not had to worry about the 'tax efficiency' of things so far. 

But, I am planning on buying some properties conventionally in the near future and have been looking at the tax benefits/efficiency of the potential passive losses in regards to my tax situation.

In my 'day job' I am self employed. Having recently done my 21015 taxes in reminded my what a huge bite SSI taxes are since I have to pay around 15% when both halves are figured in. I am at the top end of the 15% federal rates so the SSI was a bigger hit by far than the federal and state put together. 

I am wondering if I am figuring things right? Let's assume:

• 35K Self Employed Income
• Negative $5000 Rental Income after Depreciation is figured in

Would this not then lower the amount of income that I would have to figure ALL taxes on, including SSI, Federal, State, etc...? 

Part of what got my thinking a a little bit perked up is that figure goes from about 20% up to about 35% when figuring the SSI in there.

Is it also correct to assume that real estate investors that are NOT self employed dont really get any benefit even on the 50% of the SSI they have paid in since it has already been taking out of thier paychecks and there is not (to my limited knowledge) a way to lessen that by having passive losses?

Thanks, Dan Dietz

Jim, 

That is a little more complicated than mine then :-)

I agree with the above advice to talk to professional to get some guidance, but your friend should also do their own homework. It sounds like the question comes down to if party 'A' keeps the SDIRA and party 'B' stays in the house, there is mostly the '20% difference' to account for. 

Might there be SOME liquid assets that could do this? Some examples might be the equity in vehicles, cash value of life insurance contracts, etc... One option MIGHT (if the parties are trying to come up with solutions mutually) to make up the difference with a series of payments. Such as;

• If the SDIRA is worth 100K
• If the house equity is 80K
• the '20K difference' could be a payment of 5K per year for 4 years

I would think it would be cumbersome to somehow (either the QDRO mentioned above or a simple judges order as I used) have each spouse own just 'part' of the same asset - I can see  some potential conflicts coming up ;-).

In my case, my SDIRA owned 1/3 of an LLC that owned 2 recently purchased properties so the value was established by the purchase prices, and the balance in the checking account for the LLC. Together we had about 300K in retirement assets, with about 130K of it in my name of which 75K of that was the SDIRA. The other 170K was in her name. So since it was less than 50% of our total joint assets it was an easy choice for me to just keep that as 'part of my half'.

One interesting side note; do your own homework in ADDITION to seeking professional help. Case in point was my Lawyers advice that my ex and I 'could not each make a settlement payment to each other' Our situation was this;

• I owed her about 20K to settle paying her back for part of a small inheritance she had received but was used on a joint asset 
• I was fairly flush with cash that was NOT in retirement accounts since we had just sold or marital home that was paid off.
• I paid her 40K in cash (20K more than I owed her) and in return she transferred to 20K or her retirement account assets. She still came out 20K ahead. I figured there is only so many opportunities to stash money into retirement accounts (due to yearly limits).

Dan Dietz

I just went through this last year... a couple of questions (if you know the answers) I will assume a marital property situation (meaning 50-50 for the most part)

1. Do you know what % of the 'retirement assets the SDIRA contains?
2. Are there other 'liquid' assets such as non retirement cash, easliy salable assets, etc...?
3. Is either spouse planning on staying in the marital home (assuming they own and not rent)
4. Is there equity in the martial home, and it so how much relative to the value of the SDIRA?

Dan Dietz

One other things I was going to say was these are a couple of calculators I like to use:

• http://www.dinkytown.com/java/InvestmentProperty.h... from Dinkeytown - you can not save your results so I just print mine to PDF files. 
• https://www.biggerpockets.com/buy_and_hold_results... the one right here at Bigger Pockets 

They are  both great tools - I wish they could be blended together and it would be perfect !

Dan Dietz

@Mackal Smith, sorry it took so long to write back to you about this. I had a daughter get married and some health/hospital issues in the last month - but back on track now!

I dont really have a lot to say about the 'borrowing against the stocks' things just because I dont know that much about it. I guess my question would be how would those cost and interest rate compare to the conventional mortgages you can get. 

On the idea of having a partner for the downs, that could work nice, but is it worth giving up 50% (or whatever terms you came to) to put off paying taxes now instead of latter? Maybe yes, maybe no.

To my main point of having a good competent Financial Planner (who may or may not also be a CPA) that is able to look at the 'Big Picture', I think this is critical IF you want to maximize your returns (who doesn't in most cases?). 

My friend got similar advice to what you are getting of 'dont sell more, youll have to pay more taxes' - which I think is pure garbage IF you have a better use for the money. Luckily he did find a good Advisor, and had a business background enough to look at the Big Picture too. 

In VERY simplified terms, lets look at it this way;

• Lets say you are buying 100K properties for 20% down, 4.75% rate for 20 years. 
• You are getting an average of $1500 income/month, 8% vacancy, 50% expenses not including mortgage payment.
• If you round your tax rate up to 40% on the investments you would have to sell to come up with the down payment cash, you would need to sell about 35K of stock to end up with 21K to invest.
• If you LEFT that 35K making say 8% for 3 years you would have about 44K, take off 40% taxes and you have 26K to use. Over 5 years you would have about 51K, take off 40% taxes and you would have about 31K to use.
• If you DID sell that stock and buy our 100K house, would be making conservatively 20%+ not figuring appreciation. After 3 years you would make about 36K, take off 40% taxes and you would have about 22K use, after 5 years you would have about 50K, take off 40% taxes and you would have about 30KB use.
• If you did figure in appreciation, your returns would conservatively be about 30% (based on 2% yearly). This would give you 44K after 3 years - 40% taxes = 26K to use, or after 5 years about 74K - 40% taxes =  44K  to use.

The summary is that it would take about 3-5 years to 'break even' after paying taxes but getting a much better return. After that, you can enjoy the higher return long into the future. Run a few calculations of getting a 20% return instead of 10% for the next 10 years :-) 

There is also likley some huge tax advantages between depreciation, potential 1031 exchanges, etc.... 

I guess I am just biased as I have heard SO many times CPAs or other 'professionals' that base everything on avoiding taxes! The question should  be what else can the money be doing for you! 

Just my .02 that you are not likley to hear from your CPA. 

If you are thinking about looking for partners, PM me and let's talk a little. My sticking point is that almost all my funds are in IRAs, so it is very hard to leverage my funds. That is one reason I am looking at doing some Private Lending.

Good Luck, Dan Dietz

@Theresa White your husband's IRA can borrow other types of funds to help it grow faster'larger, such as Non-recourse Loans, Private Lender Loans, etc... as long as they dont come from you or another disqualified party.

I am currently looking into/working on those avenues in anticipation of our next purchase(s). So far we have been able to pay cash from our SDIRAs. 

Dan Dietz

Thank you @Loren Whitney , it seemed like there should be a place for a 1031 Exchange when a person IS USING LEVERAGE inside of their Self Directed Account. 

After looking at your reply, my understanding is that the Solo401 plans do not have to deal with the UDFI, at least on a yearly basis the way at Traditional or ROTH SDIRA has to. Does that also pertain to any Capital Gains when a property is sold with financing still in place if done within a Solo401K? 

Thanks to all of you 'Pros' out there who share so willingly  of your time and knowledge.

Dan Dietz

Here is an interesting link on the subject that I was doing some reading on too

http://www.journalofaccountancy.com/issues/2013/oc...

Dan Dietz

I think @Carl Fischer and @Loren Whitney are getting at what I was wondering in the back of my mind. I am leaning heavily towards using some non recourse financing in my SDIRA - ROTH. 

Am I understanding correctly what you guys are saying?

• Say I buy property A for 200K using 50% (100K) leverage, and it appreciates to 300K and loan balance is at 50K by then. There would be a gain of 150K.
• I sell that property for 300K, and reinvest it into an 4 plex (or whatever type of property) using that 250K of equity from the sale plus an additional 150K loan for a total of 400K using a 1031 Exchange. 
• This the tax on the profit at the time of sale of the first propriety is deferred until further down the road at some point.
• New property appreciates to 500K and I pay off the loan from operating income. So 500K 'free and clear'. I wait 1 year plus after paying off to avoid UDIF taxes on the gains. 
• Haven't I just avoided paying UDIF taxes on 400K of gain by using a 1031 Exchange and waiting the required 12 months after the loans are paid off before selling the final property?
• Of course the YEARLY UDIF taxes on operating profit are a whole different conversation.

Feedback? 

Thanks, Dan Dietz