All Forum Posts by: Brian Eastman

@Mimi H. 

Rental income is not useful for sponsoring a Solo 401k.  This is passive investment earnings, not earned income taxed at your regular rate.  You are much better off leaving the rental income as-is than trying to re-configure your business to claim that income at a higher tax rate so that you can then set it aside into your retirement plan.

@Craig Brooksby 

UBTI is documented in IRS publication 598.  There is a specific method of calculation, but for simple rough estimates you can assume the net profit of the transaction being taxable at trust tax rates.

http://www.irs.gov/pub/irs-pdf/p598.pdf

2014 Trust Tax rates follow

So, if you were to make about $30K on a transaction, figure you are going to give up about 33% and end up with a $20K return to the IRA. If that $20K return represents a better ROI than other opportunities, flipping the property can make sense.

@Matt Fisher 

A self directed IRA or 401k may invest in real estate in many ways, so long as the transaction is completed at arm's length.

Clients of ours have held rental properties, flipped properties, engaged in joint ventures with other investors to hold or develop property, invested in tax liens, and operated as private lenders to other investors.

There is a distinction, however, between passive income such as interest on a note or tax certificate, or rents from real property, and "engaging in a trade or business" such as being a wholesaler, developer or re-developer (flipper) of property.  

Income from passive activities is fully tax sheltered under the umbrella of the IRA or 401k. Income from trade or business activities like flipping is subject to a trust tax known as UBTI. The idea being that we cannot have tax-exempt entities like retirement plans, churches, etc. driving taxpaying businesses out of business by competing with them on an un-level playing field.

Even with such taxation, however, it can be quite beneficial to flip houses in an IRA. If the net after-tax return from a flip is better than the income from being a landlord or hard money lender (not to mention owning shares of Exxon or Facebook), then perhaps that is the highest and best use of those IRA dollars.

@Matt Fisher 

A self directed IRA or Solo 401k can be a great tool for diversifying your retirement investing into real estate.

These tools are not, however, a way that you can access capital for your own personal real estate business. This is tax-sheltered money intended for your future use in retirement.  If you attempt to use the money for personal benefit other than by taking distributions and paying taxes, you will have engaged in a prohibited transaction that comes with some very serious tax consequences.

So, approach this as "you are a fund manager for your retirement plan, and choose to invest in real estate", and you will be on the right path.

Dimitriy is correct that there is a lot of good information here on BP (also some inaccurate stuff, as with any web forum).  Educate yourself a bit online, but the real step forward in your education will be to speak with a few professionals in the field.

@Sam Ricochet 

Firstly, your IRA LLC provider should be able to assist you with this matter. If not, then perhaps your choice of vendor was less than optimal.

Secondly, you will definitely need to find a CPA who can assist you with this, some of the questions you ask are complex and specific to your investment transaction. I do not have a specific recommendation in the Bay Area, but can tell you that you do not necessarily need a CPA with significant IRA experience, as the 990-T filing is common to all forms of tax-exempt & non-profit entities.

The taxpayer is the IRA, and you will need to obtain an EIN for the IRA in order to be able to file. The payment itself can be issued from the LLC account and does not need to be routed and processed through your account with IRA Services Trust Co.

Straightline depreciation on the property is applied as a deduction against the taxable income, as would be other normal expenses such as real estate taxes, insurance, etc.  All deductions are applied in the same ratio as the debt financing.

The basis calculation is the tricky part.  Very doable, of course, but where the expertise of a professional will come into play.

Keep in mind, even with the hassle and expense of the UDFI taxation, you should be reaping a higher cash-on-cash return for your IRA dollars than if you had made an all cash purchase.

Best of luck in this matter and continued success for your IRA investments!

@Heera S. 

I'm sorry, but your information is incorrect and could put @Todd Tinker at risk.

Per IRC 4975, disqualified parties to an IRA include the spouse of the IRA account holder's lineal descendants.

@Todd Tinker 

Yes.  As the spouse of your mother-in-law's daughter, you are a disqualified party to her plan.  There can be no transactions, or direct or indirect benefit between her plan and you.

@Brent Mattison 

While it may delay your personal entry into real estate investing, killing your IRA would be unwise.

The better option would likely be to use the IRA to invest in real estate through a self directed plan. There are IRS rules that keep you at arm's length from such investments personally, so there is no benefit to you other than growing your IRA to a larger value by investing in what you know and can control.

If you distribute your IRA, you will likely lose between 30-40% of the capital in taxes and penalties. By investing the IRA in real estate, you will retain that investment capital and can acquire more or better properties as a result, which will produce higher overall returns than you could personally with the reduced amount post-distribution.

There is a lot of good information on BP regarding self directed plans.  Do some reading and then reach out to a few of the professionals active on the site.

@Patrick Donovan 

Yes.  With $1100, you are not going to be able to put that to much use in real estate.

But, I would strongly encourage you to continue making contributions. One day, you will have a decent size Roth IRA, and then you can start really creating some serious tax-free money investing that in real estate, notes or the like.

Save now.  You will thank yourself later.

Patrick,

It sounds as if you are thinking about scrapping the Roth IRA in favor of after-tax real estate investing. That would be unwise.

Rather, you should potentially look at investing in real estate or real estate related finance such as notes with the Roth IRA. Having the gains from such investments accumulate tax-free over many years will provide you with a large pile of funds to enjoy in your later years.

There is lots of good information here on BP about using a self directed IRA to invest in real estate.

There is no required contribution amount for a Roth IRA. The maximum you may contribute is $5500 if you are under age 50 and $6500 if you are age 50 or older.