I have a 401k and thinking of converting it for getting into Multifamily. What’s the best way to do that?
You can convert that to a check book controlled “Solo 401K” if you have your own business. This is a very easy way to convert.
Do we know how much does it cost to convert ? What is the different from self directed IRA with a custodian like Quest IRA or equity trust ?
It costs around $500 to convert depends on the company you select.
You become your own custodian in Solo 401k. So, you control the account via a checkbook. This is the main difference between Solo 401k vs custodian controlled (quest IRA or Equity Trust)
Is it true if you invest inside he IRA you can’t use the depreciation benefits you get form a regular MF investment. Your loss on a K1 at the end of the year is worthless inside of an IRA, right?
Solo 401K or IRA is a separate entity. You will capture the benefits when you cash out or take distributions. So this is a moot point per my knowledge.
I have both a Solo 401K and a self-directed IRA, and greatly prefer the Solo 401k for the checkbook control, lack of UDFI taxes, higher contribution limits, and the ability to loan yourself the lesser of 1/2 your acct balance or $50K for any reason. Also, the pricing is fixed, and fees are quite a bit less if you get to a certain balance.
Downsides are primarily record keeping, w/ a Solo 401K you need to do it all yourself as the trustee. Also, the reason I still have a SD IRA is because the IRS does not allow Roth IRA’s to roll into Solo 401k’s.
- As a deal sponsor, is it more work to take on self-directed IRA funds?
- As an investor what is the process of using IRA money?
As a deal sponsor, there is a little more work. Every SDIRA custodian has different forms and rules. It is not that much effort that is needed.
As the investor you need to roll your funds into a custodian that will allow alternative investments. You will then need to fill out some forms from the custodian. Plan on this process to take 2 or 3 weeks or more.
Info on using retirement funds for deals:
Question: I am considering investing in a 506c investment on a multifamily property. They are raising a 1 million from investors, then getting a loan and making improvements to the property and repositioning it over 5-7 years.
I wanted to use my funds from my SEP IRA which is currently in a qualified intermediary trust. What is the UBIT tax? Will I be subject to that on this deal? Also, should I set up an LLC that then loans the money to their LLC? How can I structure this for tax and liability benefits?
Answer [Note: From CPA and not this is NOT legal or professional advice]: When you invest in a business (syndicate = business) with your IRA, the IRA will be subject to UBIT (unrelated business income tax) and UDFI (unrelated debt financed income).
For our purposes, UDFI is produced when an IRA uses debt to purchase real estate. Essentially, the portion of the property’s income considered UDFI is based on the percentage of rental income derived from debt.
For example, Property A is purchased for $100,000. You put down 25% of the purchase price as a down payment and finance the remaining 75% with a traditional mortgage from the bank. The property produces $10,000 in net income for the year. $7,500 (75%) of the net income is considered UDFI and is subject to UBIT.
There is a deduction for the first $1,000 of income subject to UBIT. Income subject to UBIT over $1,000 is taxed at trust rates. For 2017, trust tax rates start at 15% and max out at 39.6% after just $12,400 of income subject to UBIT.
UBIT is paid by the IRA account. If for whatever reason UBIT is paid directly by the taxpayer, the amount paid is considered a contribution to the IRA.
Follow up question: Is there any difference in how the UDFI will apply for these:
- SD IRA
- Solo 401K
- SD IRA (operated as an LLC) so this one is confusing… My LLC owns an LLC (syndication) which owns a property
I’m trying to decide if one is better than another for tax purposes.
Answer: The solo 401(k) is not subject to UDFI but it subject to UBIT. The IRAs are all subject to UBIT and UDFI. Note that generally the passive income flowing back to you is very low and the as a result we don’t see a huge UBIT tax.
Another idea would be to take a debt position (lending) rather than equity. The interest you would receive is free of UBIT and UDFI tax.
(This suggestion of a “debt” position or note investment with the SEP IRA to avoid UBIT and UDFI tax is a creative one… but it’s a very low chance of happening because it’s just too complicated and honestly not worth the effort from the syndicators side. It’s a very similar case of to a Tenant-In-Common (TIC) arrangement where an investor has 1031 exchange funds and wants to parlay that money into a syndication. It’s possible but from the syndicator’s prospective a lot of unneeded work when you can just raise the funds the traditional way. Caveat: if you are bringing in a huge amount of money say 50% of the raise then that might tip the scales in your favor)
Ask you can tell this is a really grey area. One CPA mentioned, the answer depends on how you structured the syndication, UBIT may or may not apply for the real estate holding for solo 401k. I would really try to toss the Operation Agreement to your individual CPAs to examine and determine ahead of time.