All Forum Posts by: Brian Eastman

@Jason Fang

There are two potential issues with this strategy. You should discuss with licensed counsel prior to proceeding.

1) As a disqualified person to your IRA, you may not add value to the IRA via the provision of goods or services. Wholesaling takes a lot of hustle and marketing. If you are doing that work personally, that could be viewed as providing services to your plan and a prohibited transaction.

2) An IRA is tax exempt when receiving passive income such as interest, dividends, rents from real property, etc. Wholesaling is a dealer activity that creates trade or business income. When and IRA engages in a trade or business on a regular or repeated basis, it is taxed at trust tax rates on Unrelated Business Taxable Income (UBTI).

@Brett Smith

An IRA can use debt financing such as a mortgage. Any debt instrument must be non-recourse, meaning no personal guarantee from you.

There are a handful of banks that offer such loans, and the terms for purchases and refinances are more conservative. Be sure to speak with some lenders to get an idea of what is possible. A BRRRR in an IRA is possible, but will be a much less aggressive pathway than you can pursue personally.

In this type of transaction YOU are not putting IRA capital into the deal alongside personal financing. The IRA owns the property and the IRA is the borrower on the loan. A refinance will free up cash for the IRA to make additional investments, not remove the IRA from the deal.

When an IRA uses debt-financing, the portion of the income that is derived from the non-IRA borrowed money is taxable as UDFI. The tax does not typically add up to much because of the favorable write-offs available to real estate investments such as depreciation, interest, etc. It is definitely a topic to become educated about.

If you are self-employed and have no full time employees, you may qualify for a Solo 401(k).  A Solo 401(k) is specifically exempted from tax on UDFI in real estate projects.

The bottom line is that your proposed strategy is possible, but is more complex. That said, leverage is a powerful tool and your IRA will certainly benefit with higher net returns from the right investments when leverage is used.

@Adam Koch

The answer from @Ashish Acharya is more precise. I was being more broad, because a lot of investors toss around the term REIT loosely to refer to any private real estate investment entity. If it is a true REIT then it should be dividend income, not pass through income, and there should be no UDFI concern.

@Adam Koch

It will depend on specifically how the REIT is structured. UBTI is unlikely but UDFI could be an issue if debt financing is used in either structure and they are setup as a pass-through issuing a K-1 to the investor.

Check with the fund sponsor. They should be able to tell you if UDFI is a concern. If they cannot, they are not sophisticated enough to handle your IRA dollars.

@Eric Eckman

You have a cart before the horse issue that could potentially put your IRA in real jeopardy if you are not careful. If you have made an offer and provided earnest money in your name, transferring that to your IRA could be viewed as a self-dealing transaction that could void the entire IRA.

All offers need to be made in the name of the IRA (or IRA owned LLC if going the checkbook route). Any earnest money or expenses such as inspections may not be paid by you or a disqualified person to your IRA.

It typically takes 3-4 weeks to setup a plan, and that is assuming you have the ability to request a rollover early in the process.  I would not expect that you would be able to complete a rollover and have access to funds until late June based on your situation.

@Peter A.

Definitely get a CPA who is familiar with UDFI and a 990-T filing on board before you start.  The impact of UDFI on your returns should not be overly significant and the use of leverage will definitely produce a better return than a comparable all-cash investment.  That said, it is nice to know what to expect and also be prepared for proper recordkeeping so your cost of having the CPA do his/her job will be less.

The loan must be non-recourse, meaning no personal guarantee from you or any other disqualified party to the IRA.

@Bob E.

Thank you for your post. You are right that so many investors get intimidated once they hear there is a tax inside their IRA. It is worth taking a deeper look as you did and learning how the math actually works.

For most investors using debt-financing to acquire real estate - either with a direct purchase as you show or as a limited partner in a syndication - the tax impact is trivial.  The net result of the transaction is a higher, leveraged rate of return that would outperform the return of placing the same amount of capital in an all-cash transaction.

@John Underwood  You would never file a return if you are not engaging in a taxable activity.  That would be like a 12 year old with no earned income saying "I'm going to get a job in 4 years, so I better start filing taxes now".  

@John Jacobs

The IRA is receiving unleveraged passive interest income. There is no UBIT exposure.

@Matthew Swearingen The reason a lot of folks state they would not invest an IRA in real estate is one of theory vs practicality.

From a tax theory standpoint, real estate investments are very tax favored with benefits such as depreciation.  The argument is then "why put a tax sheltered asset in a tax sheltered plan and lose those tax benefits?".

The logic is not entirely accurate, however, as comparing personally owned real estate to real estate in an IRA is entirely different based on how you and your IRA are taxed differently. This is true regardless of what the IRA chooses to invest in.

The better question is "will real estate in my IRA perform better for my IRA than what my IRA is invested into today?" That is a true apples-to-apples comparison.

For many investors who understand real estate as an asset class and want diversification of their IRA beyond just publicly traded assets, real estate can make sense as an IRA investment.

As to your other questions, and IRA is an IRA. You can take distributions in an emergency but would be subject to taxes and a 10% penalty if you take an early distribution prior to age 59 1/2. Some qualified exemptions or hardships will eliminate the 10% penalty for early distribution. Those rules do not change, just what the IRA has the option to invest in.

Likewise a self-directed IRA in and of itself does not produce better returns. The self-directed configuration just gives you more choices. You still need to make those choices and determine the best way to protect and grow your savings.

@Anthony Laude

The IRA owned LLC is a very specialized service. At a certain level it is just a LLC, but the operating agreement is specific to the IRA concept. Linking the entity itself with an appropriate custodian and being able to provide meaningful guidance about proper usage of the vehicle something only a few specialty firms can provide with any degree of quality.

Expertise is far more important than location when it comes to providers in this niche.