Author Topic: Buying land in Self Directed IRA?  (Read 3398 times)

shotgunwilly

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Buying land in Self Directed IRA?
« on: January 08, 2015, 10:59:25 AM »
Has anyone used a Self-Directed IRA to invest in real estate?  As in buying properties, not funds.  I'd like to learn more about it and the advantages/disadvantages, how are taxes handled, etc.  It would be great to hear from someone who has done this and any useful resources would be great also.
« Last Edit: January 08, 2015, 11:10:39 AM by shotgunwilly »

27y/oTennesseeRetiree

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Re: Buying land in Self Directed IRA?
« Reply #1 on: January 08, 2015, 02:16:06 PM »
I own apartments inside my Roth IRA. I love it! Disadvantage is that I can't manage them myself, but it was the best thing I ever did for my retirement because of leverage. Principal pay down alone this year should be about $30k. My total contributions are under $50k so that is huge!

Because mine is a Roth and the mortgages are secured against real property (non-recourse) I do not have to file a tax return per my accountant. If the notes were unsecured I would be responsible for the portion of the taxes that are earned because of the note. My understanding of that is limited so I am having trouble explaining it... the trick to not paying taxes is secure it against whatever you are using it for.

Another disadvantage is you can't get loans from traditional sources because they have to be non-recourse. Also, bankers don't understand it and banks don't loan money on things they don't understand.  You can borrow from other people's retirement accounts, but I have had the best luck buying from burnt out landlords. I have 17 units financed with a seller carry back. Amortized over 15 years or less at 3% or less with down payments between 1 and 10%. There are tax advantages for them to spread it out over time, plus the interest income is better than CD rates right now.

When I am 45 all of these will be paid off. Then I have another 15 years of about $80k a year in rental income (if I don't buy anymore.) The math is awesome... it gives me an extra $1.2 Million at 60 plus the free and clear apartments. 4% rule says the $1.2 is worth $48k a year + rental income. I don't need $128k to live on and I can't imagine I ever will, but I couldn't turn $50k into $128k a year without that leverage.

I also 5% of a gym franchise inside my ROTH.

IRA Innovations, LLC is my account custodian. They have a helpful website.

27y/oTennesseeRetiree

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Re: Buying land in Self Directed IRA?
« Reply #2 on: January 08, 2015, 02:18:20 PM »
Oh and I forgot... that income will be tax free when (and if) I start drawing on it.

electriceagle

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Re: Buying land in Self Directed IRA?
« Reply #3 on: January 08, 2015, 03:18:35 PM »
Can you explain a bit more about how you got a non-recourse loan within your Roth?

I've always seen that as the main roadblock to holding real estate within an IRA.

27y/oTennesseeRetiree

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Re: Buying land in Self Directed IRA?
« Reply #4 on: January 08, 2015, 03:24:08 PM »
It's just a seller held mortgage. It limits what you can buy... free and clear property where the seller is comfortable being paid over time. It is recourse against the IRA, but non-recourse agains me as an individual. It is particularly useful for smaller apartments that an institutional investor wouldn't be interested in. I have a duplex,  triplex, quad, and 8 plex.

CashFlowTurtle

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Re: Buying land in Self Directed IRA?
« Reply #5 on: January 09, 2015, 11:34:23 AM »
What you describe is called tax evasion, and I would not recommend others do it.

The earnings from the % of the property subject to mortgage is subject to Unearned Business Income Tax UBIT (or Unrelated Business Taxable Income (UBTI) or potentially Unrelated Debt Financed Income (UDFI)).  If your accountant says you are not liable for it, he is very likely mistaken mistaken.  The IRS may not detect this that easily if the mortgages are held by the sellers, but you should still be paying tax on it.  Sorry to be straightforward, but do please do a little more homework to confirm, and ensure others know the pluses/minuses of investments.

Good job though, buying property in an IRA is great, just make sure you pay your taxes.

27y/oTennesseeRetiree

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Re: Buying land in Self Directed IRA?
« Reply #6 on: January 09, 2015, 12:27:06 PM »
THANKS Raggy!  My understanding or possibly misunderstanding was that UBIT didn't apply because of the mortgage. I will follow up with my accountant and see what section of code she got this from and I can file it and pay it.

Do you know offhand where it says that I do owe this? Also... straightforward is more than welcome.

Cheddar Stacker

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Re: Buying land in Self Directed IRA?
« Reply #7 on: January 09, 2015, 12:59:32 PM »
I haven't done it, yet. I was just researching this a couple days ago based on a recommendation from another forum member. I'm hoping to do this with a flip in a couple months. My biggest problem is the leverage as 27 and Raggy have mentioned. I will have maybe 30-35% of the necessary cash to get this done. I have financing lined up if I do it in a regular LLC, but am unsure if I can acquire a non-recourse loan on the real estate after initial discussions with the banker.

So I'm an interested follower here, but I may be able to provide some info as I learn more.

The UBTI thing will be another obstacle. I read something about it during my research but I was unclear on exactly what it meant since I'm new to this vehicle.

Cheddar Stacker

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Re: Buying land in Self Directed IRA?
« Reply #8 on: January 13, 2015, 09:38:41 AM »
@ 27y/oTennesseeRetiree, Raggy is correct about the UBIT as far as I can tell, unless you are holding a solo Roth 401k rather than a Roth IRA. Some of my reading suggested leverage would not create tax in the solo 401k version of these plans.

@ shotgunwilly, search this term over at BiggerPockets.com on their forum. It's what I did yesterday and I learned a lot.

I just summarized my understanding of all this in my journal after my many hours of reading. If anyone here is interested there's a link in my signature line.

Hopefully this topic will be discussed more often here as it could be a very good avenue for many of us to FIRE quicker.

27y/oTennesseeRetiree

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Re: Buying land in Self Directed IRA?
« Reply #9 on: January 17, 2015, 07:51:56 PM »
@ Cheddar Stacker and Raggy.

I have done some more work and some more research and told my accountant they were wrong and I was right. The form to file with the IRS is a 990-T.  The code section that relates to this specific issue is Section 514 - unrelated debt, financed income. I will post more specifics as I find out more. It is taxed at a trust tax rate. Luckily I have one partial year to amend and I am certain I can convince my accounting firm to cover any penalties and interest if there is any due.

OldStachesRule

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Re: Buying land in Self Directed IRA?
« Reply #10 on: January 20, 2015, 09:35:58 PM »
@27y/oTennesseeRetiree,

I am also interested in buying real estate within a self-directed roth.  If you don't mind, please post the outcome of your total tax liability.  From my very limited research, it seems that rental income is subject to UBIT if you have debt financed property, but prorated to the percentage financed.  I also read that the profit from the sale of the leveraged assets is subject to UDFI unless the debt is paid off more than 12 months before the property is sold.  Please confirm at your convenience.  Thank you.

27y/oTennesseeRetiree

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Re: Buying land in Self Directed IRA?
« Reply #11 on: January 21, 2015, 09:35:27 AM »
@OldStachesRule

That is my understanding.  However every year you have an unrelated third party (tax assessor, appraiser, realtor, etc) report the value of the asset to the Self Directed IRA Administrator.  For example, I just bought a quadplex for $140,000 that appraised for $185,000.  I financed 99% of the purchase price, but that is only 75%LTV.  So my understanding (and what I am still trying to confirm) is that I only have to pay UBIT on 75% of my income.  I get to take out transaction costs, all expenses, interest, and depreciation.  Then I pay taxes on 75% of the income that is left.  The issue with this is the trust tax rates go up to 39.6% REALLY Fast.  The break is $12,150. 

That being said... I wouldn't have the asset at all without the leverage and it it is amortized over 15 years.  Even if I make half as much now it will be paid off when I am 45 (provided I don't pay it off sooner) and I will get to stop paying trust taxes on it then. 

I am also going to see if holding the note in my IRA by itself without it attached to a particular property changes the way it is taxed.  One of my private lenders would let me shift my mortgage to a personal loan to the IRA.  Even if it costs me a percentage point on the loan rate it will still be less than the potential tax liability. 

I will let you know where I end up.

laird215

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Re: Buying land in Self Directed IRA?
« Reply #12 on: January 25, 2015, 01:21:09 AM »
I always wondered how the required minimum distributions at age 70.5 would play out.    This could be tricky.   Not as easy as making the minimum withdrawl from some fund.

27y/oTennesseeRetiree

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Re: Buying land in Self Directed IRA?
« Reply #13 on: January 25, 2015, 07:19:30 PM »
@laird215

That is why I chose a Roth instead of a traditional IRA. There is no required distribution from a Roth because the taxman got paid on the front end.

It might be possible to take assets out as a distribution. I'm not sure. I haven't researched it. It would be the same as stocks. Surely someone knows if you can transfer a stock from an IRA to another account as a distribution.

CashFlowTurtle

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Re: Buying land in Self Directed IRA?
« Reply #14 on: January 29, 2015, 04:25:26 PM »
Glad you were ok with my forwardness!

By the way, I looked into it and found a work-around.  If the property is owned by a C-corp, and the C-corp paid taxes and was owned by the IRA, you care just fine.  In this case the depreciation and interest expense count against income tax of the corporation.

Also note that a C-corp can earn 50k/yr with only 15% tax liability (+ state taxes). better than trust taxes.

27y/oTennesseeRetiree

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Re: Buying land in Self Directed IRA?
« Reply #15 on: February 01, 2015, 09:36:59 AM »
Good work around. I am working on seeing if the loan is unsecured against a specific property what the tax liability will be. So instead of saying this mortgage is against this specific property it will be this loan is against the entire IRA. As long as I don't pay ubit on the percentage of the loan to the entire value of the portfolio then I should be good. Unfortunately there is not an easy answer.

Might also end up doing an accelerated depreciation table on the rentals. For example depreciate the carpets, fixtures, cabinets, and appliances individually and then remaining items over 27.5 years. This would minimize or eliminate taxes until principal pay down and appreciation has a chance to reduce the loan to value further reducing taxes.

I really think taxes will be minimal if any. But I am also operating in new territory here. I'm sure someone has done this, but they aren't talking about it.