All Forum Posts by: Brian Eastman

@Kyle O'Connor

We have encountered that occasionally.  Sometimes it is not even the bank as a whole, but just a particular branch/region with a manager who simply does not get it.

The bank is holding an LLC account. An LLC can be owned by one or more individuals, other LLC's, trusts, etc., and in this case, an IRA. It should not matter. The bank is not dealing with the IRA in any way.

You will be best served just by saying "whatever!", and taking your business elsewhere.

Solera National Bank in Denver and Titan Bank in Dallas are two institutions that specialize in this area and have knowledgeable staff. But really, your IRA owned LLC should be able to bank anywhere.

@Louis Martinez

With an IRA, you do not extract the income from the investments, at least not before normal retirement age of 59 1/2. A self-directed IRA is still an IRA in all ways with respect to contributions, distributions, timelines, taxes, beneficiaries, etc. The only difference is a different plan architecture that facilitates investments other than just stocks and bonds.

I am sure @John Myers is happy to have diversified a portion of his IRA into this property that looks at the very least like a good discounted acquisition. Maybe it will also provide good income to the IRA over time through rents and the eventual gain on sale, all of which will flow tax-sheltered into the IRA.

@Paul Vail

The IRA owned LLC is a standard structure used to provide an IRA account holder with "checkbook control" over the IRA. The IRA invests into the LLC and the IRA account holder can then direct the affairs of the LLC - so long as they adhere to IRS rules against self-dealing.

An S-corporation cannot be used here because a S-corp cannot accept an IRA as a shareholder.

@Louis Martinez

Benetrends offers an entirely different type of plan designed to use retirement plan funds to capitalize an active business.  That is commonly used in the franchise space or sometimes for active real estate developers/flippers.  With that program, referred to as a Rollover as Business Startup (ROBS plan), there must be an active business at the core of the structure.  Rentals produce passive investment earnings and therefore do not qualify.

With a self-directed IRA or Solo 401(k), such as @John Myers is referring to, it is entirely possible for the plan to hold rental property as an investment.  The IRA is holding that rental instead of the IRA holding shares of stocks or funds.

@Josh Boyd

You cannot borrow funds from your IRA. It is possible to personally borrow from an active 401(k) plan.

Some people will use what is referred to as a 60-day rollover to "borrow" from an IRA for that brief window. You can only do that once per 12 months and if you miss the 60-day window, it is a taxable distribution including penalties if you are under age 59 1/2. Not a good strategy.

@Brian Orr

As a plan provider, I cannot make a specific recommendation as to a company to work with per BP guidelines.

What I can help you do, however, is refine your question.

Self-directed IRA's come in several formats offered by different types of companies. The type of self-directed IRA that will best suit your situation and goals will drive the process of identifying the right firm to work with.

A self-directed IRA custodian is a processing entity. Think E*Trade or Fidelity with different paperwork. All IRA based plans are required to have a custodian to administer and report on the account. What makes a self-directed IRA custodian different is that they are not purely connected to the public exchanges and limited to investing in stocks, bonds and funds, but rather have the staff training and paperwork to document the IRA's investment in the more individualized transactions that occur when investing in real estate, notes and other non-traditional assets. Such custodians will hold funds, sign documents, issue expenses and receive income on behalf of your IRA and act as your processing layer. This works OK for relatively static and simple investments like a private placement or crowdfund, but can become rather cumbersome and expensive with a more time sensitive and transaction intensive asset such as a rental property. You also need to be aware that custodians are passive in nature and simply process transactions at your direction. They do not provide meaningful oversight or guidance with respect to tax code compliance. I would second what @Jeff S. mentioned, that true custodians are preferable to IRA administrators.

A checkbook IRA LLC is an enhancement on the above structure that is generally more time and cost efficient for investors with a more diverse portfolio. It starts with a self-directed IRA held by a custodian, but the IRA simply makes one investment into a specially designed LLC entity. The IRA owns the LLC, but you can be the non-owner manager of the LLC and have signing authority. This allows you to directly manage transactions via the LLC and eliminates the paperwork, processing delays and per-transaction fees of the custodian. These plans typically cost a bit more to establish due to the legal work, but in most cases will save you considerably over the long term. With a quality provider, such plans also come bundled with meaningful consulting guidance to help you get the most out of the program while staying inside the IRS guidelines.

So, as you continue your research and get feedback here on BP, think about what type of program will best suit your needs and be sure to ask questions along that line. Get on the phone and speak with a few of the providers that are active here on BP. You will pretty quickly be able to tell who is just selling something and who can become a valuable member of your team.

@Greg Scott

Your numbers on UDFI taxation on debt-financed real estate are WAAAAY off, as are other statements you have made above. A checkbook IRA LLC does not automatically change tax rates to 21% unless a UBIT blocker is deployed, which would be the entirely wrong solution for this usage.

While you are welcome to express your personal opinion about the relative merits of investing tax sheltered money vs post tax money in real estate, it would be much more helpful to forum readers if you would avoid making factually incorrect arguments to support your point of view.  If you don't know the facts, then don't speak as if you are an expert.

When a deal is 75% leveraged, 75% of the income is being generated from non-IRA money. Your IRA is getting the benefit of leverage, which is great. However, 75% of the income in the deal - being sourced from non-IRA funds - is deemed taxable as Unrelated Debt-Financed Income (UDFI). That full amount is not taxed at 37% - not even close. You start with a $1000 exemption against UDFI off the top, then use the same debt-financing ratio of 75% of the allowable deductions like depreciation, interest on the note, property taxes, etc. The NET TAXABLE income will be a very small percentage of that original 75% of GROSS INCOME. The tax rate for most investors is then likely to be in the 10-25% range on those net-taxable dollars. The IRA pays that tax, which effectively reduces the rate of return on the investment slightly. The net effective tax rate is commonly in the 7-10% range for leveraged real estate deals in an IRA.

Leverage in an IRA boosts your cash on cash return. UDFI puts a small dent in that boost, but you still get the benefits of leverage and a higher net return than you would putting the same dollars into an all cash transaction. That is a win.

In order to take a distribution from the IRA before investing, you will pay taxes, which dramatically reduces the amount of capital you now have available to invest. You can start your investing with $100K in an IRA or $60-$70K in after tax money. $100K seems like it will buy more property and accumulate more value over time.

Yes, there are many advantages to investing in real estate with non-qualified funds. There are also considerable benefits to diversifying tax-sheltered retirement money you already hold into real estate instead of leaving that money in conventional financial products or taking a HUGE haircut to get it out of the retirement plan early. Each person's situation, goals, real estate expertise, etc., factor into what may be correct for them. As you have stated many times, killing your IRA worked well for you. I can list dozens of folks who have taken that approach and not made good returns in real estate for whatever reason and are now in serious trouble wishing they had not killed their IRA.

@John Romero

You cannot rent a property from your self-directed IRA. That would be a self-dealing prohibited transaction with a risk of severe tax consequences.

A self-directed IRA is purely a means to diversify your tax-sheltered retirement savings. You cannot personally benefit from the IRA or create transactions between yourself and the IRA.

While an IRA can invest in a short term rental, there are a lot of simpler and cleaner transactions types that are often better suited to IRS rules.

@Melkamu Englert

@Chris Seveney is right, the two goals do not need to be mutually exclusive. A self-directed IRA investing in real estate is probably several years down the road for you, however.

The absolute single best thing you can do as a young person is contribute to a Roth IRA. If you max out at $6,000 until you are 25 years old, you will have $54K in the Roth IRA. If you never add a penny after that (which you should) and receive 6% annual returns compounded into that Roth IRA, it will be $1.12 Million of tax-free money when you are age 60. Even if all you can contribute is $2-4K, it is worth it.

By comparison, if you were to start with the same $54K of Roth savings at age 35, you would only accumulate $580K. Time is your best friend with a Roth IRA and starting early is huge.

I do not know what your family finances are like, but if you can get help from your parents, supporting your Roth contributions would be one of the best things they can do for you. When my son was in his teens and making a small amount with summer work, I let him keep that and I made the Roth IRA contribution for him. I then also made him spend some of his earnings on responsibility building things like his own car insurance - so it was not an entirely free ride. We also encouraged him to build some non-retirement savings. What we did not want him to do was come away saying, "I worked all summer and made $8K and barely got to keep any of it".

Even if saving for the Roth slows your entry into real estate investing by a few years, you will thank yourself in the long run.

Once you get $100K or so in the Roth IRA, you can take some of that out of the stock market and diversify into real estate or or notes with a self-directed IRA.

@Paul Vail

That is an awfully big list to address on a web forum.  

The better thing to do will be to research who are professional providers of self-directed IRA plans and line up a consultation.

So many of the details with self-directed IRA and 401(k) plans are not one-size-fits-all answers. Every investor is their own special mix; with employment status, existing funds, investment goals, geography, etc., all factoring into crafting the right plan solution and the right investment strategy.