All Forum Posts by: Daniel Dietz

@Dave Foster I wish you were wrong too ;-)

As far as the 'first out being taxed as profit".....

Let's say a property is being sold for 150K. It was bought for 120K, and 30K of depreciation has been taken. So the 'profit' is 50% depreciation recapture and 50% capital gains. 

Say the seller does a 1031 and reinvests 120K and takes 30K "in boot". So I understand THAT is all profit. Is it then taxed as all 'recapture' since that is typically 'due at sale' (as in seller financing situations) or is is 'prorated' as part recapture and part capital gains? It seems that for some people those rates could be quite different. 

Thanks again, Dan Dietz

@Dmitriy Fomichenko or other Plan Professionals, 

I hear what you are saying about having different rules as far as capital contributions in a self directed account vs just a traditional LLC outside of such an account.

I am trying to figure out a way that a partner can have 50% equity for the least amount of capital outlay from their self directed account to do so. I do have a portfolio lender that I have used for other deals who has indicated that he is willing to let us do less than 40% down non-recourse as long as the LTV was in the right area.

My other thoughts of how to accomplish this would be ; Partner 1 puts 10% down with their SDRIA, Partner #2 puts 10% down with cash or their SDIRA. The two of them as partners or LLC borrow the remaining 80%. I see this as each of them put 50% of capital in and are 50% responsible for the loan.

Does this sound like a 'more compliant' way of doing things and still keeping a low down initially for those involved? These would NOT be disqualified people to each other. 

Thanks, Dan Dietz

I think when doing rentals in a retirement account the only way to go for me personally is to go the 'checkbook control' method. Very little interaction is needed once the property in purchased. 

Dan Dietz

@Costin I., 

I think you got some good responses above. More to your specific questions though.....

I own property both traditionally outside of retirement accounts and inside of SDIRAs and SOLO401Ks (better IF you qualify).  

For rentals outside of Self Directed accounts we are able to get returns of approximately say 15-20% when figuring equity building and cash flow - this is with loans of 20% down-payment. Certainly better than traditional equities over the long run and more stable too, in my opinion. There is the positive cash flow while having a tax loss benefit too consider with this method, but if you 'buy and hold forever' (somewhat our plan also) there comes a point where with rising rents and declining interest payments when that tax loss benefit goes away. That looks to be around the 10-12 year point on our 25 year amortization. 

For the rentals inside of the Self Directed accounts we are able to get returns of about 9-12 percent if not using leverage or 12-15 percent when using leverage with 40% down. Also note that if you does use say 60% leverage, you also get to deduct 60% of the depreciation. So the choice inside of retirement accounts is "do I invest in securities and get say 8-12 percent with a roller-coaster at times, or real estate where I can get 12-15% with very little volatility"? To me, for funds already in retirement accounts, it is a no brainer.

A couple of the benefits of holding rentals inside of retirement funds vs stocks is that you can essentially use leverage which you are not allowed to do when buying securities. 

You also need to remember that even though you get the 'temporary' benefit of depreciation, you will have to pay that back, at a 25% rate, some day unless you do indeed pass on to heirs down the road. 

A couple of other 'side benefits of hold in retirement accounts are that in general those accounts are more protected in bankruptcy or lawsuit cases, and if a person has college aged kids assets in retirement accounts are not counted towards financial aid calculations in many cases (but not all). 

One of the reasons  we (myself and 2 partners) bought as much as we did with retirement accounts was because we all already had sizeable assets in those accounts that we rolled over to fund our SDIRAs and SOLO401Ks. Moving forward we plan on putting very little new funds into those accounts and directing new funds towards cash purchases of rentals. 

Hope that helps your thought process a bit. 

Dan Dietz

@Josh Dehmlow some good advice here on how to handle that. 

I just want to add that for when/if it gets more complicated we are very happy with the system we are using for a 3 way LLC.

We each have an area we take care of for the most part; one does tenants, one does maintenance, and one does business management. We each keep track of our hours via the app Toggl, and have assigned a standard value per hour of $25.00. 

Once a quarter we add them up and see 'what the difference is'. Meaning if one of us has 40 hours, one 50 hours and one60 hours that the least number, 40 in the example,becomes the 'base'.

So we have ALL worked at least 40 hours which equals $1000. We take THAT amount as a draw against our capital account (I hope I am saying that right). There is NO tax on that part. We then look at the differences of who worked over the 'base amount'. The guy with 10 extra hours gets $250, the guy with 20 extra hours gets $500. Those are 'expenses' to the LLC and ARE taxed to each person who gets them.

This works great for us to make sure we are each compensated for our share of work, and to keep the tax bill down; 

Dan Dietz

Hello All, 

So if I am understanding you guys right @Mark Creason & @Dave Foster what you are saying is that if someone sells a 300K property that they have 150K of 'adjusted basis' in, and they want to take out 150K of 'boot', there is essentially no point in doing a 1031? 

I think I *wrongly*  assumed that there would only be taxes on 1/2 of the departure & capital gains, since 'half' of the money was being reinvested.

Thanks, Dan Dietz

Well, it all started back in 2011, 

I was researching 'how to do the landlord thing right'. I knew a lot of people who seemed to be doing it 'wrong' ..... they were not enjoying it, having to put cash in out of pocket every month etc, had some night mare tenants, etc..... 

When I was googling I saw BiggerPockets come up a LOT to the questions I was asking. In short order I was confident of having 'good guidelines' to at least point me in the right direction. Within a year I had formed a 3 way partnership with my SDIRA and two other SDIRAs to buy our first rental thanks to BP...... I had never heard of SDIRAs before but it was a Godsend when three friends all had large IRAs to roll-over and get going!

Since then, thanks to BP I/we have set up SOLO401ks, bought with Seller Financing, secures Private Investors, and are currently working on a series of deals that would involve all of the following; No money down (out of our pocket), Private Investors, Partial Seller Financing and a couple of 1031s! 

Thank you BiggerPockets! 

Dan Dietz

Hello All, 

Some great advice on how to avoid the tax bit and still make a good return. 

One other method that I have been working on is to partner up with investors that sound like they are where several of you are. They want to get out of the day to day, have a lot of equity from appreciation and loan downplay but are not sure what to do with it. 

We currently have 26 units. 12 we just bought about 2 years ago from an older guy with about 20 paid in full properties worth about 3M. His wife had recently passed away, so in his case he was working with 'stepped up basis' so little to no tax. We tried to talk him into doing Seller Financing (he did not need any income, he is looking to pass it on to heirs) at 5% rate but he decided to not do that and is now getting about 1% on 1M :-(. It could have been a great opportunist for the right person.

What I am doing now is looking for sellers of properties who want to slow down, but are not liking the idea of taxes, OR loss of equity building they get in ownership. My business plan outline would be to but say a  duplex from them for 150K, and then ALSO invest WITH them as partners into new building(s) so they can 1031 part/all of their gains. They would act as silent partner and bring the down payment and I would do all acquisitions, rehab if needed, and ongoing PM etc.... In our market, there can be an 8-12% return for them over the long haul, with NO work or headaches. They can still pass on the assets to heirs down the road etc.....

So there are LOTS of ways to wind down - it just comes down to educating yourself and picking the best one!

Dan Dietz

@Adam Webb, 

I think it is a GREAT tool, but there IS a lot of 'subjectiveness' that goes into it too. To me, especially if you 'expand' that categories it really makes one think of all the small miscellaneous things you might forget otherwise. 

A couple of things I WISH it had, if you are listening @Brandon Turner :-), are the ability to export to excel so we can do studies covering ALL years and a 'depreciation feature' like the Investment Property Calculator over at Dinkytown.com. 

As to your questions, it *might* be that your market like many around the country are just truly NOT profitable when ALL costs are considered. Will you have big cap-ex EVERY year? No. Same with repairs, etc.... With that said I just recently had about 12K of capex on a duplex unexpectedly the first year we owned it. 

You can somewhat 'play' with that scenario by upping your appreciation input, but to me that is gambling if you push it too high. 

A good rule of thumb to me is this; as a ballpark can you get 1% of purchase price (including any needed capex) per month as a minimum in rent? That seems to be the 'break even for us'. We factor in about 2.5% of purchase price for yearly taxes, 5% vacancy (ours is closer to 2%) 15% of rents for repairs and capex combined, we self manage so no PM, and use 2% for rent growth (ours is about 4%) and 2% for property value growth (ours has averaged about 3.75% in our area over 30 years). 

If we hired PM we would need about 1.25% of  purchase price per month to cover the extra expenses. The reason we use more conservative values than our actuals is that we would rather be pleasantly surprised with our returns than having to come up with cash out of pocket to make ends meet over time. 

Some great advice I read here a long time ago is 'dont make the deal fit'. 

Dan Dietz

@Dave Foster, 

I think I am making some headway :-) 

Now two questions that I think I am not going to like the answers to! Assumptions if you will;

1) Frank sold me Property 1 for 300K. But he only wants to reinvest 150K of it towards the new property we are going to buy together and take the rest as 'boot' to get some cash out for spending. I assume 50% of recapture tax will be due and 50% of capital gains dues at that point? 

Now on to the new place - Frank puts down the 150K as a 25% down payment on the new 600K property and we get a loan on the rest. We use a TIC agreement for his 1031 to work. We borrow the other 450K. I am detecting that with a TIC there is NOT the flexibility as in a LLC to 'assign' each of us a 50% interest in the new property?

2) I understand that the Frank and I can invest together in the new one even though *I* am the one that bought the old property from him. Could we but a different property jointly that *Frank* already owns? The thought would be that he wants to get out of the day to day but keep some of the appreciation potential. This would allow him to do that. I understand that he would ALSO have to then 1031 that sale into something else too. 

I hope that makes sense. "Frank" has a lot of properties that he would like to somehow lessen the work load on :-)

Thanks, Dan Dietz