No no no, cashing in the IRA is a terrible idea.
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Income taxes are going to be significant.
Do folks understand that Nochka can use the giant depreciation deductions produced by a short-term rental to shelter draws from the IRA?
He is going to cash out his entire $1.1M Ira and combine that with his cash on hand to buy a $800k property. That's a used property, not a new one, and the land may comprise a substantial amount of the total property value. You propose a cost segregation analysis to accelerate the depreciation of part of the improvements to write off against the income generated by cashing out the IRA.
I assume you have done cost seg studies on SFR's and have some experience with defending them. I would like to see your analysis and the numbers that you think would result from this approach for a typical $800k single family residence in your market. My guess is the tax and penalty bite after your adjustments would still make this plan unattractive to most reasonable people.
Here's how I'm looking at
@Nochka 's idea. He's talking about adding a second short-term rental. To buy that, he will use $250K of cash and then draw enough cash from his IRA to pay the other $550K. He assumed he needed to liquidate a $1.1M IRA in order to pay 40% income taxes and a 10% penalty.
I'm pointing out that on that second $800K house, a cost segregation study may point to, who knows, $250K or more of personal property that can create $250K of bonus depreciation in year of purchase. He'll also get another roughly $10K a year of depreciation on the real property.
And then he's got that first $800K house... a cost segregation study for that house may also create $250K of more of personal property. Probably that house he owned before the cutoff date for using 100% bonus depreciation on used property. But even so, he should get very large depreciation deductions from the cost segregation study especially in years 2 and 3.
Finally, he surely has furnishings in the first property (say those are $60K for illustration purposes) and will also need furnishings for second property (again say $60K)... those can very possibly be depreciated either immediately or very quickly using bonus deprecation.
Summing up, taxpayer may be able to put $300K to $400K bonus on first year tax return and then very large regular depreciation numbers on years 1, 2 and 3. That depreciation may let him shelter from income taxes the $550K he needs.
The early withdrawal penalty still applies in scenario like that described above. So tradeoff is, does something like a Section 72(t) distribution create an opportunity dial down the penalty.
In any case, the combination of taxes and penalties doesn't come anything close to the $550K figure
@Nochka gave and which I think people thought was "the right number"... The actual number is maybe $55K for the penalty unless he can work the Section 72(t) angle. (Obviously, that $55K is still a lot.)
Regarding
@Another Reader 's question about cost segregation studies and defending them... so when we see cost segregation studies, almost always, an engineer does the study. (They cost several thousand dollars.) And though I've yet to see a small real estate investor audited on a cost segregation study issue, what the engineers say is they will defend their study and guarantee the outcome. (Yeah, yeah, I know they can't
really provide a guarantee... but that's what they say.)
Regarding
@redbirdfan 's remark about self-directed IRAs... Almost all of my personal professional experiences with self-directed IRAs has been bad. (Our firm BTW does 990-T returns for self-directed IRAs.) They get set up wrong. They get mismanaged. They create complexity that overwhelms most small investors. FWIW, I have in past diligently searched for a tax practitioner who (a) knows her or his stuff and (b) actively practices in this area... and I've not been able to find someone I have confidence in. Sorry.