These days when I pass the mirror, I always wonder whose looking back at me cuz it’s sure not the 30 something person I think I am. I guess the answer to that problem, is not look into the mirror!
So, I’m looking for the good things about getting older. Know what the best thing is (given that I have no grandchildren yet)? For me it’s the day when I turn 59.5 and can take money out of my retirement fund and start spending it!
For those of you who can’t even think that far ahead, at least give some thougt to tax planning. Remember a dollar saved in taxes is a dollar you don’t have to earn! Real estate as an investment vehicle works for me, becuase of the leverage involved and the control I have and the great tax incentives. When you combine a good real estate investment with good tax planning, you can grow your wealth faster since you have some great tax free or tax deferred IRS sanctioned programs to take advantage of. Here’s a quick rundown of three of these programs to shelter real estate investment income. I’ve been using two of them for years.
Self Directed IRAs Investing in Real Estate
If you have a retirement account from a job you’ve left, did you know that you can self direct that money and invest it in real estate? Or, if you have IRAs, you can also self direct and invest them in Real Estate. First, you need a custodian to handle the transactions. Simply set up self directed IRA’s and self directed Keogh’s and 401K’s through a custodian such as Entrust or Pensco Trust. I use Pensco Trust out of San Francisco. They’re great at making sure you handle all the details and they can help you through the process. There are tricky issues to work through like needing non recourse debt financing and working through the UBIT taxes can be a challenge.
But for every roadblock there is a solution and if you have a Roth IRA and invest right, then your money can grow tax free! There are lenders willing to finance the necessary non recourse loans, and the UBIT tax is only on the leveraged portion and can be as low at 15%. Be sure to check out your particular situation with a tax professional.
In the next couple of days, I’ll write about the 1031 and the Family Foundations.
So, give it some thought. Don’t be afraid of getting older becuase it’s a blast!
Eileen, great comments regarding the Self Directed IRA. I have been involved with Self Directed IRAs for 9 years now working for Commerce Bank and now Equity Trust Company, I also do Educational Seminars all over Washington and Oregon as well. I also have found Non-Recourse lenders here in WA, and I can also give you some insight to the UBIT tax that having an Individual K or (401K) plan you can avoid the UBIT tax all together, now also taking this a step further you can also use an LLC and leverage your IRA account even more.
Nice to chat with someone from our neck of the woods.Looks like Equity Trust is a custodian but unlike Pensco, you self direct in more than real estate which is great to know. Great to have someone to ask questions that understands this stuff cuz it’s complicated, isn’t it. I do have an LLC that I bought shares of my Roth Ira, so know what you mean. I’d be interested to know how you eliminate the UBIT.I do it by loaning into one project with an equity kicker and not on title, then reverse it the next time when my partner loans in and I’m on title.
How do you compare to Pensco? they give webinars but I’m looking for someone to do a live class with. It’s such a cool vehicle.Wish my 1031 was in it. I’m using part of my Roth in Baton Rouge. Great place to invest.
Nice to chat with someone from our neck of the woods.Looks like Equity Trust is a custodian but unlike Pensco, you self direct in more than real estate which is great to know. Great to have someone to ask questions that understands this stuff cuz it’s complicated, isn’t it. I do have an LLC that I bought shares of my Roth Ira, so know what you mean. I’d be interested to know how you eliminate the UBIT.I do it by loaning into one project with an equity kicker and not on title, then reverse it the next time when my partner loans in and I’m on title.
How do you compare to Pensco? they give webinars but I’m looking for someone to do a live class with. It’s such a cool vehicle.Wish my 1031 was in it. I’m using part of my Roth in Baton Rouge. Great place to invest.
Eileen, if you use the Individual K in connection with the LLC and leverage your IRA that way you can elminate the UBIT tax since the 401K is treated just like a tax deferred account. There is a class on this 401K June 29th at John L. Scott in Tacoma Phone: 253-284-9300 contat Debi Anderson at the John L. Scott office and she can get you signed up for this class. I am also teaching a class on August 10th in Tacoma in connection with REAPS South. I am always open to doing presentations and giving investors as much information as possible. I would be happy to have coffee with you at some point and meet. Thanks,
Jim
Let’s do it Jim. Call me next week
It was my understanding that you couldn’t invest your IRA whether or not it bought shares of your LLC with a transaction that had leverage. I spent 5000 while an attorney researched this issue. Love it if you were right. Pensco told me to loan money into the transaction that my partner leveraged, but your way is easier.
The public needs classes. I spent 3 days last month in a seminar trying to confirm one way or the other. There are some in King for agents, but rarely one for the public.Pensco does webinars, though and I’m going to start announcing those.
Eileen/Jim,
I am interested in attending a seminar on investing in real estate using my IRA. I would like to purchase an undeveloped lot and build a single family deweling and sell it. The issue that I have is I don’t have enough money in my IRA to get started so I am considering doing a non-recourse loan for part of the construction cost if the lender will allow it. I know I will need to pay UBIT, but if I can make enough it seems like it should be able to earn a higher percentage rate then my mutual funds have done. I have been researching this for a while but have been reluctant to get started. I am glad to find someone who is doing this, if you can give me any information I would greatly appreciate it.
Hi Rick:
Jim and I met a couple of weeks ago and decided we would certainly work together on classes for people like you who need help. If you haven’t already established a custodian for your IRA, I would recommend Jim’s company, http://www.trustetc.com/index.html. and then he can help you individually.
That would be the first step. Jim knows this stuff way better than I do, thank heaven, but I’m going to try to help a bit,too by telling you how I handled the leveraging situation. It doesn’t work in all cases, but when it fits, it’s a great solution.
I’ve been developing with a partner for 4 years. We’ve done 9 development projects and he’ll get the financing on one of them, then I’ll get the financing on the other. When he gets the financing, then my part is as a lender at X interest rate with an equity kicker at the end. we make sure it all works out evenly. then on the next project, it’s vice versa. Jim said this was a great solution, but of course, it means you have to trust a partner. Remembar, however, usually you can make more profit by combining with a partner. I’ve worked the numbers and we do better together than each investing separately, not to mention avoiding UBIT.
Another thing you can do is invest in a house with no leverage. I know of only one place to do that, and that’s in Baton Rouge where you can buy a whole house for 25000 from a bank repo pool, the partner fixes it up with their own financing, and then you sell for a 35-40% gain in 4 months. That’s could be a 100% annual retun if it all goes well. I love this one.
A non-recourse loan is possible and there are a few lenders that will fund them with about 30-40% down, though some are promising better than that lately, but I’m not sure if they’ll fund a construction loan, since construction loans are a whole different animal and many fewer lenders do them. If the lender will get the construction loan and build it as a spec with you as the take out borrow, then you could get the non recourse financing when the home is built, then live with the UBIT. UBIT isn’t so bad, though it’s charged on rental net income during the holding period on the % that is leveraged, but when you finally sell, it’s no worse than long term capital gain.
Hope that helps and hope you get in touch with Jim and we’ll get our teaching schedule set up soon.
Hi Rick:
Jim and I met a couple of weeks ago and decided we would certainly work together on classes for people like you who need help. If you haven’t already established a custodian for your IRA, I would recommend Jim’s company, http://www.trustetc.com/index.html. and then he can help you individually.
That would be the first step. Jim knows this stuff way better than I do, thank heaven, but I’m going to try to help a bit,too by telling you how I handled the leveraging situation. It doesn’t work in all cases, but when it fits, it’s a great solution.
I’ve been developing with a partner for 4 years. We’ve done 9 development projects and he’ll get the financing on one of them, then I’ll get the financing on the other. When he gets the financing, then my part is as a lender at X interest rate with an equity kicker at the end. we make sure it all works out evenly. then on the next project, it’s vice versa. Jim said this was a great solution, but of course, it means you have to trust a partner. Remembar, however, usually you can make more profit by combining with a partner. I’ve worked the numbers and we do better together than each investing separately, not to mention avoiding UBIT.
Another thing you can do is invest in a house with no leverage. I know of only one place to do that, and that’s in Baton Rouge where you can buy a whole house for 25000 from a bank repo pool, the partner fixes it up with their own financing, and then you sell for a 35-40% gain in 4 months. That’s could be a 100% annual retun if it all goes well. I love this one.
A non-recourse loan is possible and there are a few lenders that will fund them with about 30-40% down, though some are promising better than that lately, but I’m not sure if they’ll fund a construction loan, since construction loans are a whole different animal and many fewer lenders do them. If the lender will get the construction loan and build it as a spec with you as the take out borrow, then you could get the non recourse financing when the home is built, then live with the UBIT. UBIT isn’t so bad, though it’s charged on rental net income during the holding period on the % that is leveraged, but when you finally sell, it’s no worse than long term capital gain.
Hope that helps and hope you get in touch with Jim and we’ll get our teaching schedule set up soon.
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Hi, Eileen. I am glad you are happy with our service and that you are our client. We can support educational activities in your area as we regularly provide seminars in Seattle, Tacoma, Bellevue, etc. Kathy Holcomb, our NW Business Development Officer would be happy to collaborate with you and some of our other Washinton state “Preferred Professionals” that collectively can assist you as a team to further educate the public, etc. If you would like to learn more about this, please give me a call at (800) 969-4472, ext. 5608. I’d love to chat with you and thanks for the compliments!
Hi Tom:
Thrilled you found RCG, I do have your icon on my website http://www.seattlenumber1homesite.com to take them to you. You’ll like that! I do want to start blogging about the specific webinars that you do and do need to hook up to see the best way to do this. Give you a call, soon
Help!!!!! Who are the lenders that will do non-recourse loans in the State of Texas???????????
Who deos non-recourse loans in Texas?
We don’t mean to ignore your request here on Eileen’s post, but I’m not sure anyone here knows this answer. None of us work in Texas.
Non-recourse lenders usually loan nationwide. You’ll find a list I’m compiling at Self-Directed.info. I hope this helps!
Seth, I emailed you the list of non-recourse lenders offsite, and now it looks like Jennifer has another list and is another source for self directed IRA information. Welcome Jennifer. I’m glad to find another site rich with information.
I can help with non-recourse loans in Texas and purchasing Real Estate through your IRA. Please email your information to IRAagent@IRAagent.com and I will get back to you!
Thank you Eileen. And David, I’ll add your name to the list!
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Where does the IRS state that a self-directed IRA must pay UBIT tax when it borrows money to purchase real-estate?
Publication 598 applies to Non-Profit Organizations. An IRA is not a non-profit organization.
Furthermore, non-profit organization’s pay UBIT tax from income they derive from business activities that are not-related to their tax-exempt purpose. For example, an educational non-profit organization whos purpose is to teach English to immigrants that decides to purchases real estate for rental income would have to pay UBIT.
But here we are talking about IRAs. Its not even a non-profit organization AND the purpose of an IRA is to make as much money as possible for retirement. So please tell me why everyone thinks that an IRA would have to pay UBIT when it borrows money to buy real estate.
Ah Art, that would be because the income generated from money loaned to the IRA is indeed classified as “business activities not-related to their tax-exempt purpose.” Someone has to be taxed for the extra money your IRA is able to make as a result of someone else fronting the money to do a deal. That’s just how the IRS works. It only provides so much tax protection for IRA investments. Once you’ve borrowed money outside of your regular contributions then the Unrelated Business Income Tax (or a 6 percent penalty on personal over-contributions) applies. Does this layperson’s explanation help?
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