Original message
| Carol
  |  "investing in your IRA with a loan"
, Mon 30 Apr 08:37 
My Roth Ira "did a deal" last year, using a non-recourse, hard money loan. It was a rehab, and the sale was to have closed by Dec 31st. In fact, we did not close (thereby paying off the loan) until the next tax/calendar year.
I understand that this generates for me some sort of 'taxable event', and that it comes under the category of something like "unrelated business income", but so far have no real knowledge of what I have done to myself!
My CPA is useless.
Guess I can write Mid-Ohio, my custodian, but thought this might be a good opportunity to post.
BTW, Matt, glad to have met you in Orlando!
Carol Kostic
"committment is not about time spent; it's a line you cross"
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Replies:
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| DBoddiford
| "Re(1):investing in your IRA with a loan" , Thu 3 May 10:10
Carol -
The UBIT (unrelated business income tax) issue does affect you in this case because your IRA owned a property that had financing against it. Let's say for example, that the loan was 50K and your IRA put up 50K additional to purchase the property for 100K. This means that your IRA (not you) would owe income tax on 50% of any profit (50k/100k), whether it be from rents or sale. Since IRAs are a type of trust, the income tax rate for trusts apply, hitting 39.6% at $8,650 of net profit - and that is just the federal tax!
All this is to discourage tax deferred accounts from competing with taxpayers. So, in the future, give them what they want. Have a friend own the property with your IRA making a loan/option on the property so that 90+% of the profit can be drained out when it is resold. The IRA doesn't own leveraged property and no income tax is due.
It is all a matter of structuring.
Dyches Boddiford
www.DBoddiford.com
(770) 428-7846
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| | Carol
| "Yikes! Hardly what I wanted to hear!" , Thu 3 May 12:09
However, ignorance is what got me into the situation.
Knowledge can get me out of it.
Guess I was shooting blind on this stuff.
SO.... Now I also have a piece of property, seller financed, in the IRA. My intention was to hold on to it for 5-6 years and sell it, 'cause while it is somewhat marginal now, it will become a pretty decent "Professional" location by then.
It cash flows 'marginally', but the purpose was more to hold and realize the gain in the IRA, and I thought I was so smart!
So, any suggestions as to what to do now? We closed on this less than a month ago ... and since I know "self dealing" is a no-no, I'm a bit at a loss.
Have the iRA sell it to 'someone' and then buy it personally and 1031 the gains later? I am REALLY open to suggestions and more than grateful for all your help.
Impressed, too.
Rgds,
Carol Kostic
"committment is not about time spent; it's a line you cross"
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| | DBoddiford
| "Re(1):Yikes! Hardly what I wanted to hear!" , Thu 3 May 15:48
Your marginal income will most probably keep you from paying UBIT now. The small income will probably be sheltered by deductions and exemptions. The problem will definitely be there when you sell for a profit.
OK. How about selling the property to a friend or, better, to a friend's LLC (depending on your state's law)at a price barely above your basis. Now, it is important that this friend be a "financial friend", but not someone with which you have a business relationship -- that would a prohibited person.
Your IRA then takes an option on the property. When the property is resold to an independent 3rd party, the Option must be cleared. The price to clear will be calculated to strip off the majority of any profit.
Results -- your friend gets a little money for holding title. Your IRA gets the majority of the profit without ownership of a leveraged property. Therefore, no tax on your IRA.
Dyches Boddiford
www.DBoddiford.com
(770) 428-7846
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| | Carol
|  "You're going to get tired of this one!"
, Thu 3 May 16:26
So, in order to keep the seller financing in place, how about the IRA sells it to a friend's LLC on a wrap, and doesn't record the deed ... or does, and trusts that the seller (who is elderly and ill anyway) doesn't notice?
And what about a relative's LLC?
Is that too close for comfort?
Carol Kostic
"committment is not about time spent; it's a line you cross"
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| | Carol
| "You've made a believe of me!" , Thu 3 May 12:28
Thanks... will do.
Carol Kostic
"committment is not about time spent; it's a line you cross"
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| | Carol
| "Re(2):investing in your IRA with a loan" , Tue 1 May 14:59
My IRA obtained a hard-money, non-recourse loan in 2000 to purchase and rehab a SFR. As it turned out the buyer wanted to do the 'finish' work himself, so we arranged a 7 month lease simultaneous with a Purchase and Sales contract (not an option), with closing 7 months down the road . (we had put on a roof, electrical upgrade and CH/A ... he did everything else)
As it turned out (let me point a finger at the lender!), instead of closing on the sale in 12/00, we closed late Jan 2001, therefore, the funds from the loan were still "in the account" on Dec 31st.
In Jan we closed, payed off the lender, remitted the funds to Mid OH, and closed the Escrow account (of which I was trustee) which Mid OH had suggested 'they' open so that expenses could be paid locally and I wouldn't have to send a DOI for every electric bill!
Yes, thank you. A profit was realized ... in 2001, from a property leveraged in 2000. THIS is what, as I understand it, generates the Unrelated Business Income tax situation, and is why it is preferred to close out such a transaction before the end of the year.
When I queried my CPA (you heard me complain about him enough already!), he just looked blank.
Any input that I can feed him so that my return for 2000 is done properly would be appreciated.
Thanks.
Carol
Carol Kostic
"committment is not about time spent; it's a line you cross"
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| wgreau
| "Re(1):investing in your IRA with a loan" , Mon 30 Apr 21:32
Hey, sweet thang, welcome to Dealmaker's Cafe!!!
Thanks for posting, hope we'll see you around here now & then.
Isn't Matt just about the best lookin' Dude you've ever seen?
Not to mention all his other attributes. (Got to be careful...people will think I'm something other than what I really am, right?) Carol, I've got a good joke I will be sending to your neat husband, Dennis. Hope you guys are happy & well. Two very neat people and I have missed being in touch with you. George Yeiter could answer your question if (for some reason) you can't get it from **** Desich and Matt knows how to get in touch with Yeiter, I believe.
William Columbus OH
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