All Forum Posts by: Mat Sorensen

It's possible. I've seen 20% down on non-recourse loans. Life insurance companies will lend in commercial or multi family properties and they lend on-recourse. I'd look into life insurance companies as I've seen many clients use them over the years under non-recourse loan terms with "bad boy" carve outs.

Yes, you'll need a self Directed IRA with a custodian that allows real estate. An IRA/LLC is also commonly used by IRA real estate investors. A few other thing to note is that there are special rules when using debt or a mortgage with an IRA to buy real estate (loans must be non-recourse, and there may be UDFI income tax). Also, you need to keep your personal interests and those of close family separate (spouse, parents, kids) and the IRA can't transact or benefit these people or yourself personally (e.g. your IRA can't buy your mom's duplex she's selling).

Robert, I wouldn't recommend speaking with your IRA custodian about this as they will be forced to distribute the entire IRA if a prohibited transaction occurred. I'd recommend speaking with your attorney or one who works with IRAs as that is attorney client privileged. I'm not sure if a prohibited transaction occurred but you don't want to get into that conversation with your custodian. Generally speaking, you are disqualified to your IRA and cannot deal with the income or assets of the plan personally be receiving payments in our own account or by personally paying taxes. If you simply want it distributed then you'll pay tax and penalty on the distribution and you pick up the income now in your personal return.

@Casey Mericle it can be done on large deals or small deals (single family). The concept and rules are the same. 

@Casey Mericle This is a very high level question that I sometimes consult clients for hours on but let me try to point you in the right direction. First, you can't have two IRAs equally invest into something at the same time and break up the ownership/profits 80/20. IRAs can only take credit for making investments and the IRA getting 80% for the same dollars as the IRA putting in 20% would raise a self-dealing prohibited transaction issue. On a practical level, a custodian just wouldn't allow the investment as the allocation has to then be for something other than dollars. Can you otherwise obtain higher ownership in your IRA over others IRAs who invest in the same deal with the same dollars? Yes, but it depends how you do it. If your IRA invests into an asset first (e.g. gets a property under contract), takes the initial risk and then sells out interests in the investment to other people IRAs (or non-IRAs) then they can be paying a higher value later because now the investment is different. For example, I have clients who secure apartment deals or larger investments with their Roth IRAs or 401(k)s (get a property under contract and due some initial due diligence and their roth pays for this) and then they essentially syndicate and sell off ownership in the deal to other people (IRAs or non IRAs) at a higher value. This takes very careful planning and structuring but it can be done. The sequencing of this concept must be done correctly and their are tax issues too that must be considered to ensure that UBTI/UDFI is avoided or minimized. I hope that helps.

@Justin R. SDIRA assets can be co-invested with personal assets. What you can and cannot do is a result of the tax code...the tax code is the opposite of logic so keep that in mind when looking at how the SDIRA can be used with anything you are personally involved in. Most SDIRA investors invest their IRA in its own deals and stay out of having a personal financial stake because the rules are complex and illogical. One way your IRA can co-invest is say your want to buy a rental for $100K. Your IRA can put in $50K and you can personally put in $50K. The ownership is broken up 50/50. We usually use an LLC for this (see Chapter 14 of my book for details) but it could be done tenants in common on the deed. This works because the IRA and you personally are only getting ownership for what you and your IRA put in and you are co-investing together (as opposed to transacting between). In your loan scenario, your IRA is loaning to a company you are a minority owner in and the IRA is therefore "transacting" with a company where you have an interest. That makes a big difference in the rules and the cases (e.g. Rollins) have been clear on that.

Thanks @Edmund Ricker

Yes, get a separate bank account for each LLC and make sure each respective property is titles to its LLC. If you want separate liability treatment you have to treat the assets, income, and expenses of each LLC separate. If you don't, there's little benefit to the separate LLCs. There's no need to get a DBA. Also, yes, Texas does have series LLCs. That's a good option if you have multiple properties.

I've transferred myself to an LLC about 10 times and have had over a thousand clients with real estate they personally own with a loan in their personal name transfer to their LLC and have never had a bank invoke the due on sale clause. They won't give you permission either though. I agree with the other comments that they don't care if the loan is current.

Yes, if they did invoke the clause it's a default in the loan and they'd have to allow you time to cure (like missing a payment) so you could deed it back to your name if necessary. Though I've never had a client who needed to do this. 

Justin,

That was a good summary of the rules. As to your questions, this gets to an additional rule known as the self-dealing prohibited transaction rules (aka, conflict of interest prohibited transaction rule). 

I've copied you question again below and provided my thoughts and some legal references. 

I want to put my IRA money to work here, and the intent of the rules would be met - only the IRA would benefit. But, I don't think the letter of the rules would be met. Couple options I see (did I get this right?):

(A) Own 49% or less of the LLC. The SDIRA can then invest in debt from the LLC without issue. --> I wouldn't recommend that course. The IRS can still allege a self-dealing prohibited transaction if a disqualified person is financially benefiting in the transaction. If you owned 49% of the LLC you would be benefiting from your IRA's loan to the LLC. There is a prohibited transaction case, Rollins v. Comissioner, T.C. Memo 2004-260, whereby a retirement account owner loaned his account to a company he and his wife owned 30% of and the IRS found a self-dealing prohibited transaction as the company he had a significant personal stake in was benefiting. I go over self-dealing and this case in more detail in Chapter 6 of my book. 

(B) Perhaps loan money to an individual. What happens if that individual turns around an invests in the LLC? --> I wouldn't recommend that either. The IRS will also claim a prohibited transaction if the person who receives funds from an IRA then uses those funds to invest with a disqualified person to the IRA (or a company they are involved in). That sounds like what would happen here. The DOL explained this in 29 CFR 2509.75-2.

Can someone out there make me smart? --> It took me 10 years to figure this stuff out. Based on your questions, you've got a really good handle on this already and knew to ask where you didn't. That's the equivalent to a karate brown belt. :)

Partners can be your best friend or your worst nightmare. This one sounds like the ladder. Did the partner split all the profits he made or did he try to stick you with a portion of the losses? I suppose the tip here is to close out unused entities/companies with partners (dissolve with the state) lest one of them go rogue...