All Forum Posts by: Kevin E.

"I want to do a major remodel on that unit"

"I have a family member that I want to rent the place to"

"I've been thinking about moving into that unit"

"You have violated our noise/smoking/etc clause and have not heeded our warnings to comply or move out"

"I'm pretty sure I can get $xxx.xx for the place but don't want to stick that kind of increase to a current tenant"

"I know this is a terrible inconvenience for you. How 'bout I give you your entire deposit back and pay for your first month's rent at your new place?"

My question regards the treatment of my 1031 exchange expenses. I did not initially know I should bring cash to the closing of the relinquished property to cover "non-exchange" costs such as security deposits and prorated taxes, insurance, and prepaid rent. Since that closing, I have learned that the most conservative guidance is to treat these items as taxable boot since they were paid from the sale proceeds. Bummer; I was hoping for a tax-free exchange and hoped trading up in equity and debt would be enough to ensure this.

Now I'm reading that some accountants treat these items not as an expense but as non-recourse debt that has been assumed by the buyer of the property, and therefore can be netted against debt I assumed with the replacement property. Bye-bye boot, right? A Technical Advice Memorandum 8328011 supposedly describes this treatment of security deposits, although I have been unable to locate and read this document for myself. Is this considered an overly aggressive and possibly disallowed approach? If you had to argue for or against this position, what precedents would you refer to? No trying to break any rules, but do want to pay more taxes than I need to either.

On the replacement property, are seller-paid closing costs considered cash paid on my behalf to net against the loan origination (and other non-exchange) cash that was paid from the QI funds at closing?

Thanks Brandon and anyone else that has a thought on this.

Me too me too! I love sauce, sauce is my favorite. I followed the links and everything. Sauce!

And thanks.

As an alternate take, I'm reading a healthy and informative discussion about various investment and accounting styles. I just account and interpret for different communication styles (aggressive, laid back, accusatory, ultra-affirmative, etc) and harvest the facts and ideas.

Currently my takeaway is similar to others - there's more than one way to analyze and execute a deal.  I'm still in awe of those of you who find deals with ARVs of twice what you're putting into it in purchase and renovation. 

Important point, how bout we expand the OP's question past purchase analysis and accounting style, into the disposition stage. What percentages and/or amounts do you disclose when selling your properties? Do you paint the rosy picture and let the buyer be responsible for due diligence to find the true value of the property? Or do you help them out by disclosing two years of tax returns, repairs, age of appliances, roof & HVAC, late rent, etc?  Is hiding (when legal and/or when you think you can get away with it) the ugly stuff a legitimate way to increase one's bottom line?

Thank you for the information @Dmitriy Fomichenko  , that is helpful. UDFI is a type of UBTI. Now I know where do direct my research.

Thank you, @Bill Exeter and @Jay Hinrichs 

So flipping is an active investment that brings in UBIT issues when done within an IRA, got it. I understand using a Solo 401k mitigates the UBIT taxes, but are there additional considerations when operating an active flipping business within a Solo 401k?

While we newbies have you long-time experts on the line...

Since the intent to fix and flip is a tax-intensive enterprise vs the intent to hold for rental and 1031 exchange, would it therefore generally make sense to

• buy your rental properties with post-tax non-retirement funds and
• invest in fix-and-flips within an SD-IRA / Solo401k as long as all the work is hired out?

I've never done a flip, more of a buy and hold guy. Is it even possible to make a profit while avoiding the self-dealing limitations?

I'm interested in this exercise as well.  I don't have the credentials to give you any advice, just trying to clarify the question.  So for the sake of your side-by-side comparison, you want to figure out the after-tax value of $300,000 at retirement, with the constants you've established:

Purchase real estate (as opposed to notes, tax liens, etc) by leveraging $300,000 currently held in a retirement account

Assuming a 33% tax & penalties loss for all distributions.

Assume that the investment would perform equally in both scenarios, with the following exceptions:

• Property held in retirement funds require using an unrelated party for maintenance and other "blue collar" tasks. Have you put a price tag on your labor vs contracted labor? Give us your best estimate of the percentage to include in the maintenance/repair/replacement costs
• Property held in an SDIRA would require setup and administration fees, including the establishment of an LLC for greater check control, as you mentioned. Has someone out there determined a reasonable cost for this as a percentage of Gross Income?
• If could establish a simple business and qualify for a Solo 401k instead, theoretically you could dispense with the LLC and save on some of those setup and administration costs. Anyone want to throw out a theoretical cost difference between SDIRA/LLC vs Solo 401k setup and administration? You would want to include the cost of UBIT in the IRA option.
• What else?

For capital gains, with the retirement account your pre-tax appreciation dollars are taxed at retirement. On the other hand, your post-tax Roth, and a little less than $500,000 of your post-tax non-retirement dollars (if you choose to 1031-exchange your way into your eventual retirement home and use the Section 121 exclusion), would be tax-free.  You would have to assign a value to the cost of taxing your retirement dollars now or later.

For depreciation, you're deferring post-tax/penalty dollars that will be repaid at retirement (assuming you want to actually spend your retirement funds and not just 1031 them till death and take advantage of stepped-up basis). I'm curious to see a calculation that accounts for this over time. As best as I can see, that $800,000 investment should spit back at least $20,000 in depreciation deductions each year, which pays for your $100k tax/penalty for the early distribution in about five years and could be leveraged into an additional $80,000 of property each year. At retirement, your recapture rate would be 25% verses whatever your retirement distribution tax rate would be.

In either case you get to borrow from the IRS, so you would have to decide if that $20k/year loan outside the retirement account is better or worse than the tax-deferred loan you'd be paying back with 10% interest by taking the early distribution

Finally, there's the marriage consideration. If my wife found out I was making an early distribution from my 401k/IRA to invest in real estate, given the questionable purchases I've made thus far, I would be made to sleep outside of our owner-occupied primary residence and be highly depreciated.

 Thanks for the reply, David. I was hoping you'd see this and comment. Have you closed your quad yet?

Fair question. Due diligence was a combination of my own walk-through's, the professional home inspection, and a contractor's repair estimates. I think I have a pretty good idea of the issues, but not sure my purchase price correctly factors them in, and the 1031 exchange deadline somewhat forces my hand. I don't expect to lose money, just won't make as much as I had hoped. If I can get them fixed up enough to attract reliable tenants, I'll feel better about it.