Posted by John Merchant on August 03, 2003 at 19:15:20:
It’s common courtesy as well as much better practice to state what the facts of the cases were, in citing case decisions.
Any judge would laugh you out of his courtroom or chambers if you came in with case cites without some factual background & detailed legal opinions stated in decisions you cite. Just saying these cases ruled in favor of the position you espouse wouldn’t cut the mustanrd without explaining WHY and what the cases were about, their factual backgrounds, etc.
Are these citations germane to the issue in point? On holding that the IRA investments were subject to UBIT? Was that the specific legal issue? And was that the specific legal ruling of each of your citations?
Question about taxes on rehabs/flips - Posted by Michael Wong
Posted by Michael Wong on July 16, 2003 at 22:53:27:
I assume the best entity to use for rehabs/flips is a corp. Question is, what if anything can be done to reduce the amount of taxes one has to pay on profits? Doesn’t seem like there’s much you can do. Obviously if you did 20 rehabs in a year and made a bunch of money that would be great, but paying 40-50% in taxes “sucks” for lack of a better word. Writing off things like company cars, etc. etc. would only make a small dent … is there anything else that can be done? I’ve heard of people who do a tremendous number of rehabs/flips per year … 20, 30, 50, 100+ … do they just “happily” pay the 40-50% in taxes and be glad they are making a lot of money?
Re: Question about taxes on rehabs/flips - Posted by JHyre in Ohio
Posted by JHyre in Ohio on July 17, 2003 at 06:13:09:
See my How-To article for choice of entity. With flips, at some level you run out of rational deductions…amd them the taxes kick up. You could do a number of flips through a retirement account, though that denies you direct access to the money. Barring that, I know of no silver bullet, barring real losses to offset the gains - and as bad as taxes are, incurring real losses is worse.
Posted by Micheal Wong on July 17, 2003 at 08:44:47:
Thanks for the reply. Yes I intend to do a lot of investing through my self-directed retirement account, but I probably want to stay away from flips right? Won’t that classify me as a dealer, and my deals will be subject to UBIT? With UBIT being as high as it is, it effectively negates any benefits of doing deals in the retirement account in the first place no? I would love to do rehabs and flips in my self-directed IRA if I could figure out how to avoid UBIT. Any ideas??
A knowledgeable opinion! - Posted by John Merchant
Posted by John Merchant on July 22, 2003 at 10:28:36:
I just had an interesting little conversation with Mr.Richard Desich, President of MidOhio (now Equity Trust) re this UBIT issue.
He told me they have had NO clients whose RE buy & sell activities (on F & C props, with no debt financing)inside their IRAs have been levied UBIT by IRS.
As he said: “What’s the difference in buying and selling stocks for profit, and buying and selling SFRs for profit? As long as there is no debt financing, the properties are held in IRA for investment, no UBIT. Just like buying and selling stocks for profit.”*
Because of his company’s vast experience with their thousands of clients and their properties, I think I’d go with his opinion.
*as I understand it, there are only 2 reasons to buy stocks. Dividend income & profit selling for more than one’s cost.
Posted by John Merchant on July 17, 2003 at 15:00:07:
No UBIT unless there’s some income, other than your capital gain of sale price minus your acquisition & fixup costs…which has zero tax if it’s done in your SDIRA, through Equity Trust, etc.
Would be UBIT if you had to rent for a month or two, but shouldn’t be any killer.
Were Mr. Desich’s clients dealing with the IRS in the context of an audit of their IRA accounts? As they say, all tax strategies work until audited.
Mr. Desich’s analysis misses one key point: a person buying and selling stocks for a profit is not a dealer because they have no customers within the meaning of IRC 1221. See Helvering v. Fried, 299 US at 176, Securities Indus. Ass’n v. Bd of Governor of the Fed. Reserve Sys., 468 US 207, 217-218, (1983), and Wood, 943 F2d at 1050-1053.
More info, similar to yours … - Posted by Micheal Wong
Posted by Micheal Wong on July 24, 2003 at 11:24:24:
Here’s some info I just received from a “friend” that I will be pursuing immediately. Figured I’d post it here for anyone else who is interested …
“There is a possibility that this could be a business activity. There are no hard and fast rules, although Dick Lipton at the Baker and MkKenzie office in Chicago has done apaper on capital gain versus ordinary income, and potential of being a business. There are many issues, including intent, whether you retain a sales force, frequency and amount. The last two have to be significant, in the case´he cites it is over one hundred. Call him and ask about his paper regading business versus investor issues.”
Posted by Micheal Wong on July 24, 2003 at 11:08:02:
From a strictly legal standpoint I would disagree 110%. IRS publication 598 specifically states on page 9 that “property held primarily for sale to customers in the ordinary course of a trade or business” IS subject to UBIT. And that’s exactly what you would be dealing with when flipping properties - you are in the business of buying with the intent to fix up and sell to an end user/customer … it’s technically a business. Publication 598 seems clear on this, no??
On the other hand, what you’ve found out from MidOhio is somewhat encouraging, but do you really want to base your retirement funds on what one person says, regardless of who that person is? I mean, think about it. Isn’t there simply the chance that none of their clients have been audited? That’s the whole issue here … what happens IF your IRA is audited? The chance is slim, but do you want to “risk it”? Personally I wouldn’t go ahead and do something just because other people who are doing it haven’t been “caught” yet. I mean, don’t get me wrong, but what you are saying is that just because 100 people rob a bank and don’t get caught, that is good enough reason for you to go ahead and rob a bank since you feel confident you won’t get caught? But man, what if you DID get caught … LOL
Michael is correct. Flipping property through your IRA will classify you as a dealer (i.e. running a business through your IRA) and therefore subject you to UBIT. I also realize that there is a lot of disagreement on this subject, but we have had numerous outside counsel review this and they have all agreed taht it will result in UBIT.
Bill Exeter
Diversified Retirement Services Corporation.
Posted by Micheal Wong on July 19, 2003 at 17:34:13:
Both my research and my tax attorney insist that once you start doing flips of any kind in your IRA, your IRA will be classified as a dealer - which makes ALL of your deals subject to UBIT. The tax code seems pretty clear on this. You do not agree that an IRA becomes a dealer once it starts flipping??