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Proceed with caution! Before looking outside consider partnering with yourself. Provided this is a new purchase of a property neither you nor a prohibited party owns, you can partner with yourself.
Let’s look at an example:
Purchase of a 6-Flat in Aurora, Illinois for $500,000.00
All four â€œentitiesâ€ will take title to the property with their 40%, 30%, 17.40% and 12.60% respective undivided interests. The title vesting will be lengthy as each IRA has partnered with John and Sarah. John and Sarah could also bring in assets from the sale of another income property they owned, if feasible.
A few days later, John calls and clarifies that his current employer will not allow him to self direct any portion of his SEP-IRA. Again, John and Sarah discuss adding another partner and ultimately decide against this as they weigh the pros and cons of potential problems with partners. Instead, they opt to take out an IRA mortgage on the new property.
John and Sarah then â€œrun the numbersâ€ on their prospective purchase. Since the loan will only represent 30% of the purchase price, the property’s rent will cash flow sufficiently to meet the bank’s specific underwriting guidelines for an IRA mortgage. John and Sarah also look at the potential tax consequences of a debt/mortgage financed IRA purchase. They are comfortable with the fact that any real UBIT/tax would be minimal.
They complete the application forms necessary to proceed with the mortgage. As the next week passes John has a meeting with their real estate attorney. Their attorney raises the issue of personal liability should John and Sarah be sued as partial owners of the Aurora property and advises them to consider closing and taking title to the property in the name of a new Limited Liability Corporation (LLC) that she would form.
John calls to ask our opinion as to whether he should or should not use an LLC. Since this is a legal issue outside the realm of the IRA, we decline comment. However, we do inform John that they can use funds from their IRAs to purchase shares in a newly formed LLC, which can then be used to purchase property.
At the same time the bank also indicates that it has no problem with closing in the name of the LLC. The cost to form the LLC is a major consideration. It adds an additional $3000.00 in expenses to the transaction. They choose to proceed with the LLC in spite of the costs.
As you can see, even simple real estate purchases have twists and turns that influence the structure for your self directed IRA purchase. The decision to purchase the property with an LLC funded from combined IRA accounts enabled the investors to leverage the transaction, reduce liability and keep all management decisions within their control.
The best partner in a real estate transaction is often you!Â When structuring a transaction, please feel free to call for our perspective on compliance.
Steve Miszkowicz is the President & Managing Member of Chicago Trust Administration Services LLC
Â©2008 by Chicago Trust Administration Services LLC, all rights reserved
You may remember Shirley and Neil, they have many investments in their self directed IRA, and these investments were starting to pay off. Cash was starting to accumulate in their IRA, and they decided to take a holiday in the same resort that they owned timeshare/condo in. As we mentioned last time we wrote about Shirley and Neil, they could not stay in their own condo because it would have been a prohibited transaction.
Well anyway Shirley and Neil were really enjoying the vacation, and one night they were sitting having a few drinks when they overheard the couple at the next table talking about an old fellow who had died, apparently the old man had a local property which he had not visited for a fair time, and the people at the next table were wondering what was going to happen to the property. Neil leaned over and told the people that he had overheard them talking and was wondering where the property was. The couple at the next table were surprised but friendly and gave him the address and directions to the property.
The next day Shirley and Neil left early to take a look at the property, Shirley turned to Neil and said “you realize we can’t afford to buy any real estate at the moment, don’t you?” Neil looked at her and said. “Don’t worry , it’s not for us, We are going to put this real estate in an IRA.”
Approaching the house they were a little taken aback. The paint was blistered and cracked, and the yard was a mess. Shirley was disappointed until she walked around the corner and saw the breathtaking views the property had. They quickly saw the possibilities the house presented. Neil had a good look around and determined what he thought was a good price, after taking off the cost of doing it up. Shirley turned to Neil and said “Darling, do you own rental real estate in your IRA.” Shirley and Neil decided there and then they would keep the house if they got it and rent it out.
Neil spent the next morning tracking down the owner, and told them he could put put a deposit down, and give them a note for the rest of the purchase price. After some discussion they decided on a larger deposit, and the remainder paid of in thirty six months. Shirley called their IRA custodian and arranged for them to draw up a mortgage and note and sent to the owners with the contract draft. After the documents were approved, she directed them to sign the documents. Shirley and Neil’s IRA paid the deposit and borrowed the remainder through owner financing. As Neil said. “It was one way to own rental real estate in your IRA.”
Shirley and Neil’s IRAs had some outstanding loans maturing soon, and they knew they would be able to meet the mortgage repayments, plus pay for the repairs to the house. Six months later Shirley and Neil were happy, as the rental on their new property was paying much higher returns than they had expected, their repair bills were less than expected, as the repairs were mainly cosmetic, and the real estate manager of the property sent them a letter telling them the property was worth eighty per cent more than they had anticipated. The only drawback as far as they were concerned was the fact they had to pay a tax called UBIT on their part of the deal that was Debt Financed Income. But as Shirley reminded Neil. It was one way to own rental real estate in your IRA.” All in all, they thought that they had a wonderful and profitable holiday. Indeed they smiled all the way to the bank.
Again if you find this too hard to understand, or you can’t be bothered with all the rules and regulations, there is a simpler more TURNKEY solution to investing in real estate with your IRA. Just go to the url at the bottom of this article and thenceforth to my website, there you will find more information.
Author, Blogger, & Entrepreneur Jeff Nabers discusses an investment philosophy completely void of Wall Street securities products. Most well-known for Self-Directed IRA & Solo 401(k) education, Jeff discusses inflation, cash flow real estate, international real estate, how to avoid a bubble, investing in small businesses, and gold ownership. This discussion panel took place in the main hall of freedomfest in Las Vegas on July 11, 2009. In this clip, Jeff mentions the unique real estate activity in Lima, Peru and how Americans can profit from it.