All Forum Posts by: Thomas Rutkowski

 Mass Mutual and Penn Mutual are both paying a 6.4% dividend right now. An Indexed UL should easily make 7-8% average returns. Note: IUL returns are based on the movement of an underlying stock index. They generally have a floor of zero and have limited upside, but they are much better than actually being in the market... especially right now.

Don't get hung up on the returns of the life insurance. The magic of this strategy is the arbitrage created outside of the life insurance policy. Even in years where an IUL earns zero, I still have a loan against the cash value that is creating value on the outside.

And when I retire, I will borrow against the policy to create tax-free income. The CV of a life insurance policy can provide about 2 - 3 times the income of money held in a typical IRA/brokerage account. Why? Because it never leaves the policy. All of the money, plus gains, is always working.

To answer your question, Yes, it is exactly the same as leveraging real estate. The primary difference is that since it is a principal-protected asset class, the Line of Credit you get will most likely be more than you would get from a bank. Unless you are in an area with above average appreciation rates, I think the "appreciation" on the cash value will be greater. National average real estate appreciation is 4%.

You certainly don't need the expense of a checkbook SDIRA if all you are doing is investing in a single syndication deal. You can save a lot of money by simply using one of the big SD-IRA custodians. They can handle the account transfer/rollover for you.

The checkbook IRA is only necessary if you need to write a check on the spot to clinch a deal. That is not the case in a private placement deal.

@Animesh Das An alternative you may not have considered is doing a Monetized Installment Sale. This is structured much like a 1031 exchange, only the contract with the intermediary is a 30-year interest-only installment sale. That's where the tax-deferral comes from. The "monetized" part is in the form of a 3d party loan. The payments from the intermediary exactly offset the payments on the monetization loan and you walk away from the closing with cash that you can invest outside of real estate, private lending or alternative investments, for example.

 You are probably thinking that you are borrowing your own money back. That is not the case. A policy loan is a loan from the insurance company (or a bank) to the policyholder with the cash value of the policy serving as collateral. As long as you can find an investment to cover the interest cost, you are quite literally putting your money to work in two places at one time.

You may also be thinking that it takes years to build up cash value. That is not the case either. A properly designed and funded life insurance policy for this application should have about 80-85% of the premium going to cash value in the first few years. 

So if 85% of your money is making 6-7% in a principal-protected asset class, and you have an equivalent line of credit at prime (4.25% recently), do the math for your own investment returns. It works. You are earning the spread on top of what your cash value earns. You'll be growing your money at a faster rate than if you simply made the exact same investment with cash.

I'm a little late to the thread, but a good solution for your seller might be to use a Monetized Installment Sale instead of a 1031 exchange. This would allow them to defer the taxes on the sale and still get cash after closing. In a monetized installment sale you defer the taxes by selling on an installment contract (seller financing) through an intermediary. The monetization loan lets the seller walk away from the closing with cash that can be used for any purpose. They don't HAVE to get back into real estate right now. Lots of CA sellers are deferring their capital gains using this planning approach

@Bryan Pham A good solution for you might be to use a Monetized Installment Sale. As everyone has stated, you cannot do a 1031 Exchange with a personal residence. However, you can do a Monetized Installment Sale. This would allow you to defer the taxes on the sale of your personal residence. In a monetized installment sale you defer the taxes by selling on an installment contract (seller financing) through an intermediary. The monetization loan lets you walk away from the closing with cash that can be used for any purpose. You don't HAVE to get back into real estate right now. Lots of CA sellers are deferring their capital gains using this planning approach.

@Douglas R. A good solution for you might be to use a Monetized Installment Sale instead of a 1031 exchange. This would allow you to defer the taxes on the sale of the land but get cash at closing that you can deploy in any way you want - you don't have to get back into real estate. In a monetized installment sale you defer the taxes by selling on an installment contract (seller financing) through an intermediary. 

There is only capital gains tax to pay when there is constructive receipt. If the contract is interest-only, the seller will never have constructive receipt of the sales proceeds until the last and final balloon payment is received - even if that is 30 years in the future.

So if you pay interest only for the first year and then begin making principal payments, the seller will have NO capital gains tax or depreciation recapture during the first year.

How can there be depreciation recapture if the seller has not received the proceeds? 

Understand the implications of an interest-only loan.

Another strategy for deferring capital gains tax is a Monetized Installment Sale. This allows you to get cash at closing and 30 years of tax deferral. With this strategy you don’t have to worry about the tight 45-day timeline to identify a replacement property. And with cash, you have the freedom to shift your investments into a protected position. I think this is what you are ultimately trying to accomplish.

I'll add onto Todd's comments here. Todd really didn't point it out, but he represents the middle ground between the options discussed here. REITS and direct ownership are not the only two options. REITs are Publicly Traded Securities. That's why they are liquid. 

There are hundreds if not thousands of syndicators and others who offer Private Securities under Rule 506(b) or Rule 506(c). Private securities offer the most important benefit of direct ownership: depreciation. But as an investor in a private placement, you don't necessarily have to have the expertise of the sponsor/syndicator. The barrier to entry is much lower.

The main barrier to entry is the accredited investor status needed and there is an easy way around that for sophisticated, but non-accredited investors.