All Forum Posts by: Brian Eastman

@Adam A.

There are two entities, at two different points, thus the confusion.

A Solo 401k needs an employer to sponsor the plan. Think Ford Motor Company establishing the Ford Employees 401k plan. This can be any form of self employment activity, including sole proprietorship, LLC, S Corp, C Corp... The first question you reference above appears to be related to "which entity should I use as my plan sponsor/employer".

The Solo 401k is a trust, and that trust may invest into real estate and other non-traditional assets. Some folks choose to implement a LLC between the 401k trust and real estate investments. This can be beneficial with a large portfolio, where one might wish to create liability segregation between various plan assets. Any LLC of that nature would need to be a newly created entity specifically created for that purpose, in which the Solo 401k (or self directed IRA in that format) is the sole member. In this case, such an LLC would be an investment of the plan.

Hope that helps.

@Shawn M.

I think you wrote the deal would be 80/20.  The law allows for any formula, but typically the amount of equity would be what you want to go with.

@Shawn M.

I agree that a deal of this nature does not require SEC registration.  With one partner in a real estate deal, you are not creating a security.

An alternative to having your friend buy equity in your LLC would be to vest title jointly as tenants in common. His IRA custodian should be able to handle fractional interest in real property.

The unfortunately reality is that a lot of custodians are not very helpful when it comes to helping you figure out how to actually transact with their accounts.  Some if this is by rule, but some is institutional within the particular organization.  

A real estate attorney with some familiarity with the particular custodian should be able to help you out.

@George Rodriguez

I'm not sure about the trustee deed situations.

As for the IRA, the custodian of the IRA would be highly unlikely to forward such a letter to the IRA account holder.

@Account Closed

2 turns a year would meet the "regular and repeated" criteria outlined in IRS publication 598 under which UBTI applies.

"Dealer Status" is a different consideration and applies in the after-tax world.  Many people incorrectly want to equate dealer status as the threshold for judging exposure to UBTI under a retirement plan, and are at risk as a result.

@Greg Wright

The mention of 10% early withdrawal penalty tells me you are looking for current income. That really does not work well in a self directed IRA, whether the investments are passive and entirely tax sheltered, or a trade or business activity subject to UBTI.

If your desire is to flip houses to derive income for yourself, the Rollover as Business Startup program is the correct way to accomplish this using existing retirement funds.

@Leo B.

In a Solo 401k or IRA, the gains are tax sheltered back to the retirement plan and you must remain entirely at arms length. In the case of flipping, there is the trust tax of UBTI at the transaction level. This model is comparable to having a 401k invested in the stock market, but with different choices for investments. It is all about future retirement savings.

In the ROBS plan, the retirement plan purchases shares of an operating C Corporation.  You can be an owner-operator of the corporation, be hands-on with the business activities (i.e. real estate development/re-development) and draw a salary.

All income to the C corp will be taxed at corporate tax rates, which top out at about 25% in most scenarios for this type of activity. Additionally, any income you draw as salary will be taxed to you - but, that is the case when you take distributions from the IRA, so kind of a wash in a certain sense.

So, the key difference is WHY are you investing?  

If you are investing for the future of your retirement, then a Solo 401k is better.  Sure, you will have the high tax rate on flips, but over time you will accumulate capital and have a mix of passive income such as rentals or hard money loans or (dare I say it?) stocks that are not taxed.  You can create a real nice nest egg.

If you are really looking at that retirement plan as a means to put yourself in the business of flipping houses, then the ROBS plan can make a lot of sense.  

And, if you do well with the ROBS plan, you can have the best of both worlds.  Once you start spinning off some real cash, you don't just take a paycheck, but you also make hefty profit sharing contributions back into the retirement plan that owns your corporation and make tax-sheltered investments with that.

@Tilmon Smith

A "regular" 401k plan (or a profit sharing plan, defined benefit plan, etc.) can be self directed.  The problem is that the administrative overhead is complex and those are not always the best vehicle for non-traditional investments.

In the Solo 401k format, plan administration is greatly simplified, since you are not managing anyone else's retirement savings.  In a broader "ERISA" qualified retirement plan capable of holding non-owner employee funds, the administration is complex, and you also take on a fiduciary responsibility for your employee's funds.  Such plans are limited in the percentage of assets that can be placed in non-traditional assets, and you have to provide the ability for your employees to self direct their participant accounts within the plan.

My suggestion would be to work with an experienced tax/retirement plan specialist to come up with a custom company retirement plan such as a Safe Harbor 401k or profit sharing plan. Be sure to have the plan drafted to allow for in-service distributions, under a criteria that you meet today (age, time of service with the company, etc). This would allow you to contribute generously to the 401(k) plan, but then periodically distribute via non-taxable rollover to a self directed IRA that you use for real estate investing. Wall St firms do not typically include in-service distribution features, because they want to keep the funds in the plan and under their management.

@Leo B.

Folks often confuse UBIT and UDFI (which is a subset of UBIT).

UBIT (Unrelated Business Income Tax) applies when a tax exempt entity engages in a trade or business on a regular or repeated basis.  Flipping houses is considered such an activity, and the gains would be subject to UBIT.

UDFI taxation (Unrelated Debt Financed Income) applies when a tax exempt entity uses debt financing such as a non-recourse mortgage. The percentage of the income that the entity receives derived from the borrowed funds is taxed. UDFI does not apply to 401k and other qualified plans, but does apply to an IRA.

@Doreen Chaisson

State dealer status does not impact whether UBTI applies.  The federal language in IRS publication 598 refers to "engaging in a trade or business activity on a regular or repeated basis".  That gives the IRS a good amount of leeway to determine that more than one flip in a few year period meets that criteria.  The idea that one or two per year does not meet this threshold is less than conservative, as two per year would certainly be both regular and repeated.  One per year would even meet that criteria in the right facts and circumstances.

If your intention is to flip houses in an continued fashion, factor in UBTI as part of the equation.  

The key thing when considering UBTI is to look at the ROI the investment creates. If you flip a house and net $30K and give up about a third of that to taxation then you are left with $20K. If your total cost on the transaction was $100K, then that still represents a 20% return. Most folks are not earning 20% in their IRA buying indexed mutual funds or even holding rental properties.

"Double taxation" is moot. When you take money out of an IRA, you pay taxes on that money, regardless of whether the IRA originally earned 1.5% from a CD or 20% post-UBTI from flipping houses. If you were flipping houses (successfully), you'll have a much bigger pot from which to draw on in retirement. Sure, you'll pay more in taxes, but in this case, that is the good news.