All Forum Posts by: Kevin Gray

@Grant Fairman

Anytime you can do the work, there is no better way to generate some sweat equity!

Just want to provide some basic tips to avoid additional taxes penalties on two common scenarios.  We've seen a lot of new investors/house hackers struggle to receive rehab loans and turn to their own finances:  

-Cashing out retirement savings (401k,IRA,etc..) : By doing this you could be setting yourself up for a huge tax hit. If under 59.5 years of age, you will also have a 10% penalty on top of the income taxes owed on the amounts withdrawn.

-Loans from friends and family members : The IRS may look at a loan as a "taxable gift" from a family member/friend and not an actual loan if provided to you interest free.  This could cause tax implications for the individual providing you the funds.

Best of luck!

@Michael Doherty

Mike, it sounds like you are going into REI full time and will be using your real estate license to further your career. Though it took some time for your FINRA licenses and a few bucks, it will not help you in your real estate venture. If you do get involved in syndications or LP's, you're looking at conflicts of interest anyway if you were to maintain investment licenses/clients. And not to be a jerk, but no investors or firms will really care if you have any series licenses in the real estate world. I've learned that myself. Being a CFP with over a decade of experience and a tremendous amount of hours/dollars going towards designations/licenses, very few people care about them at all....especially in real estate, unfortunately. Save yourself the headaches and costs! You won't need them for REI.

Give @Brian M Sweeney a shout!  He owns a ton of property himself.

Based on what you're saying, it seems like you will not be paying back the $50k.  

 IF the $50k is going to be paid back at some point  (either by selling the property, refinancing, etc...), then this could be treated as an interest free loan.  The gift would no longer be the $50k principal of the loan, but the foregone interest would be the actual gift.  The AFR (applicable federal rate) is what would be used on a standard loan similar to yours, so this AFR amount would be considered the gift...which on 50K, would be much less than the annual 15k exclusion.  Meaning, no taxable gift at all if under $15k in interest for the year.

More steps and paperwork involved to adequately record as a loan and not a gift.

@Austin Steed

Give @Brian M Sweeney a shout.  He's very knowledge and located in the booming Columbus market.

@Herve Francois

If you're looking for additional flexibility on funds that are locked up in the Solo 401(K) account, a Roth conversion would allow you to access assets prior to 59.5.  The conversion would require paying income taxes on the funds now (without penalty), but they would then be able to grow tax free and withdrawn tax free.  Could lead to significant savings down the road.   Or for accessing prior to 59.5, any of the assets you pay taxes on during the conversion, you'd then be able to access after 5 years.

I'm not a Solo 401(K) expert, but maybe if you did receive a refi on a property owned outright and had additional funds that were required to stay within the account, this may be a way to get them out and have full access without penalty in 5 years.  Can anyone confirm?

@Hunter Adams  A loan can be a great source of capital when needed, but you must be careful.  I will mention that the stats show more often than not, when individuals take out loans, they do not get repaid or they stop contributing to their plan.  This will hurt their retirement savings growth and projections significantly.

If you leave the job or are forced out (which many times people don't see coming) you may have to pay back that loan sooner than expected.  If it's not paid back, it will be considered a taxable distribution plus a 10% penalty.  This could be an issue if your money is tied up in a hard money loan or something similar.  Say you make the loan but are locked in for a period of time prior to being able to access or remove your investment and are now forced to pay back the loan.  Now you're hit with a big tax bill that you may not have the liquid funds to cover.  Just something to keep in mind!

When you say inherit, I'm assuming you mean from someone other than a spouse (which would have it's own rules based on type of ownership of property and if you live in a community property state or not).

If not a spouse, you or the individual receiving the property will receive a step up in the basis of the property to the Fair Market Value at the time of death.  This will be your new basis for depreciation if placed into service.  Keep in mind the land value needs to be removed for calculating your new annual depreciation amount.

Also, if the property inherited has multiple owners, owned by a trust with multiple beneficiaries, etc.. then the depreciation calculation and step up percentage may change and will need further review by a professional.   

@Thomas Barrick

I'm sure CPA mentioned this, but keep in mind when analyzing your total gain on the property, you will not only be taxed on the gain above your cost basis for the rental unit, but will have to recapture the depreciation taken on the rental property over the 4 years it was in service.  This rate can vary but the max recapture tax rate is 25%.  

Could be a horrible surprise if not already factored into your ROI calculation.

@Grace Donahue

You may be eligible for the Consolidated Omnibus Budget Reconciliation Act (COBRA).  COBRA is a health insurance program that allows an eligible employee and her dependents to continue receiving health insurance benefits when an employee loses her job (or leaves voluntarily).  It's going to depend on what type of insurance you were previously covered under and size of the company you were with.  Usually your premium will be higher to maintain the coverage but it does give you a temporary solution up to 18months if you qualify. 

In regards to being full time in "passive income jobs", depending on what type of businesses you'll be involved with, your age, any active business associated in generating the passive income, etc... there may be ways to qualify as self employed and deduct the cost of your health insurance premiums when purchasing an individual plan.  Otherwise,  medical premiums and expenses paid out of pocket could be deductible if itemizing deductions and expenses are greater than 10% of adjusted gross income in 2019. 

There are many options available and depending on the intricacies of your situation, it's tough to say what the best options are for you obtaining health insurance.  Many professionals in this space willing to help.