Hello all. I am working on getting my first deal financed. Last month, I switched my IRA to a self directed one with Equity Trust. When ready to invest, I thought I could just call them up and say…“put x amount down on this property I want to buy”. Boy, was I wrong. They have SOOOO many stipulations to using MY IRA that they are making it literally impossible to fund my purchase. I am using conventional financing. They said that IRA must be on title. Nearly impossible to find title company to close like that. They said that my investment can not be secured by me personally, that I would have to use something like my house that I live in as collateral (doesnt fly in Texas, a homestead state). They said my note had to be “nonrecourse note”, and I refuse to hard money right now… too costly. ALL these stipulations are making it impossible to use my IRA in a way that I see fit. I am sending this email out as a warning to all noobs. Be sure you ask what stipulations your Self Directed IRA will have on you when you want to use the money. As it stands, I will probably move money elsewhere and eat the “processing and establishment of account fees” of nearly $500.
Good Morning,
All is not lost. Use the funds you have to buy sub2. You will still profit, and you may have enough in your account for this. Start small, build it and you won’t need nonrecourse loans. I will research and see if I can find a nonrecourse lender. They do exist, though it is still greek to me, Darin
There are many non-recourse lenders, but your typical minimum loan amount is one million.
Thanks guys. I was too overwhelmed to figure out their system, and I need to close next week. Equity Trust has a list of lenders they work with, GODWINZ… I can get you their list if you need it… one million…lol… nowhere near there in my business plan. As it stands, I am using a cash advance for down payment. Got a sweet deal. I will research other SD IRAS companies, and I will try to understand EquTRust’s way of doing business. I need that money to be alot more liquid.
Start a LLC or s-corp. Use the IRA to fund your LLC or s-corp. Then you get a check from your IRA to the business. Then the business can do business. You still have to check with a CPA to make sure you’re following the rules, but you’ll get far more control this way. Equity Trust will just make sure it is a registered business for a legal purpose.
Don’t blame Equity Trust for all the restrictions - they are standard for SDIRA’s. Marcus makes a good point. You may want to check out guidantfinancial.com, they are a facilitator and help with the LLC path. But you’ll still have to follow the rules or run the risk of having all or part of the IRA treated as distributed subject to tax and penalties.
I understand that there are laws and regulations that we must follow. The frustration I feel is that when Equity Trust did their “marketing seminars”, they failed to mention just hard it is to “self direct”. In their spiels, they make you feel like it will be a piece of cake to use YOUR money, when in actuality, it is virtually impossible. As an inexperienced investor, you don’t even think to ask…well, EquTrust, tell me what the process will be when I need my money…You assume it will be as easy as they are making it out to be. I realize that I have more work to do understanding this, and I realize that I have not exhausted all my efforts in trying to “legally” use my IRA for my business. My email was more of a warning to other noobs who may have mistakenly thought like I did, that by having an self directed IRA you are free to use your money at will…that all it would take is a phone call, and bam, the money is there. WRONG> I appreciate the tips, and I will follow stated advice. Thanks!
Here is some more misrepresented info that was given BEFORE taking on a SDIRA. How many of us kept hearing that by using your IRA, your profits would not be subject to taxation? WRONG. Just found out that profits made from using IRA is subject to income taxes. . Ie. IRA=10K,Loan= 90K. You sell house for 200K. You pay taxes on 90% of your profits as an “unrelated business income tax”, IRS pub 598.
Yeah, you’re right about the unrelated business income tax. You pay it on the part of your real estate profit that stems from leverage. (And note that you would also pay UBIT if you used an S corporation or LLC.)
Note that you wouldn’t pay if you used all cash. Also, note that you would not pay UBIT on interest income (say you were being second mortgages, etc) or on rent income.
BTW, there’s are another couple of hidden rubs here, too…
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Your IRA will owe a 990-T tax return each year (that’s the return on which you calculate the UBIT). And that’ll jack your costs.
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Also, realize that by using your IRA, you’re turning your real estate profits from depreciation recapture and capital gains ( which would be taxed at low or lower rates) into ordinary income (which will be taxed at your higher ordinary income tax rates).
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You will need to liquidate the real estate some day in order to take the required minimum distributions from the IRA.
I observe that many of the people who get all stoked up about SD IRAs for real estate haven’t thought through all of the consequences.
offline
does it make a difference if 2 self-directed roth ira’s own membership of the LLC? what about if roth’s own a % of LLC, and the individuals own the other %?
isn’t there an exception in UBIT for real estate business, as long as they don’t buy and sell too many in a year?
we’re looking to use LLC LOC’s to buy properties, but not keep them. using roth/LLC would, i believe, allow us to avoid short term capital gains.
your observations would be greatly appreciated.
thanks
jim williams
Rent from real estate is not considered UBI… Capital gains won’t be considered UBI either.
But there’s an exception to these rules when you use leverage… when you use leverage, that portion of your profits that come from the leverage are subject to UBIT.
There are two ways to make sense of this:
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Remember that the UBIT is in a sense a way to level the playing field. Without the UBIT, nonprofit organizations could run businesses and not pay any income taxes.
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Note that when you’re talking about pension plan thingamajigs (like IRAs) typically the government does tax the underlying profit when it’s earned. E.g., your IRA invests in IBM… IBM makes money and pays taxes on that money as a C corporation. Your IRA doesn’t pay taxes on the dividends it receives from IBM… nor on the capital gains it earns by buying and selling IBM stock… but later on you will pay taxes on these dividends and capital gains when you withdraw them from the IRA.
I again restate my generalization: SD IRAs are overrated for real estate. Many of the people promoting and using them don’t understand or haven’t thought through the effects of the UBIT and then related issues like the required minimum distribution rules, ordinary income charactertization of real estate profits, and so forth.
Er, sorry. :rolleyes
Sooooooo,
after all the taxes being paid ,I’m still making money ,right.
Seattle, I really appreciate your input as I am soon planning to use a self directed IRA to purchase some property and not take the profit until retirement.
What is your thoughts on this scenario. I purchase 2 homes. Both 300k. Using 50k down payment per property. I repair both and sell both . Repairs per home are 50k each. Sales/sold price for each 500k per property. Hud 1 shows 7% costs to sell. Owned 30 days, purchase to completion of sale.
One home bought with 50k from IRA.
2nd home bought with 50k from wallet.
conventional financing for both,
What would tax liability look like,
Darin
May be a short quiz on this later. And I realize you are NOT ACTUALLY giving real advice, Thanks.
www.pensco.com is another SDIRA company they have a ton of educational webinars on their site for free.
www.iralending.com North American Savings Bank is probably the most experienced lender for NOO Non recourse IRA loans.
Good luck ; becareful with whom you seek advise from on this subject.
greeky,
thanks for the warnings about this product.