Posted by John Corey on March 17, 2006 at 05:36:12:
Def,
Be very careful about understanding how the fees are calculated. One or more of the trustees structure the fees based on account size or based on the transaction volume. You might be causing yourself higher fees by spreading around the accounts.
You can have multiple IRAs at one trustee. After you have checked them out (maybe by the web or by having accounts at each) consider consolidating so that you reduce the fees and the hassle of learning multiple processes.
If you do take the time to open accounts are multiple trustees and later consolidate report back to the group here what you have learned about each.
I’m just wondering if anybody can tell me about their experience in using a self-directed IRA to purchase real estate.
The company I’m most familiar with in this arena is Equity Trust (www.trustetc.com).
Does this type of arrangement only make sense when one has enough money to buy a property outright? What about buying a rehab project? It seems difficult to fund the rehab through that self-directed IRA, but illegal to do otherwise.
If one is NOT buying a property outright, I know they make it possible for the IRA to purchase a percentage of a property. But apparently there are tax consequences to having the IRA take out a loan, correct?
Let’s say I have $50K in my IRA and I want to buy a $100K house to use as a rental. I can NOT buy the house for $100K in the name of the IRA, use $10K for a downpayment from the IRA, and then hold the mortgage in the name of the IRA, right?
But I could title the property 50% to the IRA and 50% to me. I could use the $50K from the IRA to purchase 50%. Let’s say I charge $800 per month for rent. Do I have to send $400 per month to the custodian of the IRA? Let’s say I get a 20 year note and my payment is $475. Can I call the other $325 per month profit and then just give my IRA 50% of the proceeds after I sell?
I have several rental units right now and I’m looking to increase my portfolio. However, I am trying to conserve cash. I’d love to have access to funds from my IRA to use for REI, but it seems overly complicated if you can’t buy outright.
Posted by John Merchant on March 17, 2006 at 22:39:20:
You’re trying to make it overly complicated when it really isn’t.
A SDIRA can borrow money from a lender to finance a property, and we have a Seattle area bank or two who are now doing NON-RECOURSE loans to SDIRAs…meaning the bank can look only to the property in event of default, and SDIRA owner can’t be held liable.
Re: Using Self-Directed IRA for REI (Equity Trust) - Posted by JeffGinFL
Posted by JeffGinFL on March 16, 2006 at 15:52:53:
Will -
I recently purchased a property using my IRA funds. I own 77% of the property and my partner owns 23%. My IRA supplied my portion of the purchase money and my partner supplied his out of his own funds. It is a rehab and when the bills come in from the contractor, I submit them to my IRA. My IRA pays 77% of the invoice and my partner pays the remaining 23%.
I found the whole transaction to be quite simple to execute, after getting acclimated with the paperwork initially. I have my IRA with Equity Trust and found their folks to be quite helpful.
As far as your $100k example goes, you could buy a home for 100K using money from your IRA as a downpayment and borrowing from a nonrecourse lender. In my research, I found that these types of lenders generally do not exceed a 70%LTV and they have criteria around the amount of the balance that will be maintained within the IRA. For those reasons, your thoughts about only putting 10k down on a deal such as that one would most likely not work. Again, this is just based on my research - you may find other lenders who have different criteria.
Also - my understanding is that you cannot title a property 50%IRA and 50% you directly. That is not permitted by the IRS as I understand the rules. But again, I am no expert so you may have found something that I do not know.
Talk to a custodian you are comfortable with…they will be able to answer alot of your questions.
im still learning about IRA’s myself but i learned that you can use your $50k to buy options, LLC memberships of another company, beneficial interests from a land trust.
im signing up with Equity Trust and Pensco Trusts.
Posted by Bob Smith on March 19, 2006 at 24:45:06:
IRAs pay income tax as trusts, which have extremely compressed brackets. Seems better to have your IRA form a C corporation and have it borrow instead.
Re: Using Self-Directed IRA for REI (Equity Trust) - Posted by John Corey
Posted by John Corey on March 16, 2006 at 01:30:54:
Def,
Why sign up with two trustees?
I have experience with Equity Trust and have recommend them to other people. I have no experience with Pensco so I can not comment on that trustee. I was at Entrust and moved to Equity Trust to get better service.
I have multiple accounts at Equity Trust (one is a Roth and one is a SEP IRA). Historic reasons for the two.
Re: Using Self-Directed IRA for REI (Equity Trust) - Posted by JeffGinFL
Posted by JeffGinFL on March 17, 2006 at 06:27:25:
I’m not certain you could use the LLC as your partner…especially if its a single member LLC.
My understanding is that you cannot (or perhaps should not is more accurate) use your IRA funds for anything that can bring you, personally, financial benefit. The financial benefit must be realized within the IRA. Profits, losses, expenses need to come from/go to the IRA account and not your personal or business account.
So if you use your LLC, and it is a single member LLC, the IRS views your profits/losses from that LLC as passthrough items on your personal tax return…meaning you don’t file a seperate return for the LLC, correct? With that being the case, I believe the IRS could state that you derived personal benefit now from using your IRA funds and that would cause you problems.
Again, I’m no expert, but I believe that concept could be flawed, given what I have assumed above.
Re: Using Self-Directed IRA for REI (Equity Trust) - Posted by JeffGinFL
Posted by JeffGinFL on March 17, 2006 at 06:15:43:
We took title in a land trust with my LLC as trustee.
So the property is titled in the name of the trust and the beneficiaries of the trust are my IRA and my partner.
i want to open multiple roth IRAs so i figured open 1 at each company. also ill be using land trusts and the trustee im planning to use is familiar with Pensco. but alot of the personal recommendations goes to Equity Trust