Jan 29

The Unrelated Debt Finance Income Rules

Internal Revenue Code Section 514 requires debt-financed income to be included in unrelated business taxable income.

Under Internal Revenue Code Section 514, if an exempt organization, such as an IRA owns “debt-financed property,” some portion of each item of gross income from the property, and a like portion of all related deductions, are included in unrelated business taxable income, whether the income is in the form of rent, interest, gain on disposition of the property, or some other character. Property is debt-financed if it is held for the production of income, its use is not substantially related to the organization’s exempt purposes, and there is acquisition indebtedness with respect to the property. The term “acquisition indebtedness” generally includes any liability incurred before, contemporaneously with, or after the acquisition or improvement of the property if it arose because of the acquisition or improvement or if the need for the indebtedness was foreseeable at the time of the acquisition or improvement.

Under Internal Revenue Code Section 514(b)(1), property is “debt-financed property” if it is held to produce income and “acquisition indebtedness” with respect to the property exists at any time during the taxable year (or, in the case of a disposition, at any time during the preceding 12 months). The application of Internal Revenue Code Section § 514 has a wide application. For example, it has been held that securities purchased on margin can be debt-financed property.

The Unrelated Debt Finance Income RulesWhen a debt-financed asset is sold, a special rule applies for the purpose of calculating the taxable gain. The property’s average adjusted basis is the average of the adjusted basis as of the first day during the year in which the property is held by the organization and on the day the property is sold or disposed of. The percentage of gain taxed is the percentage that the average adjusted basis on sale or other disposition of debt-financed property is of the highest amount of acquisition indebtedness with respect to the property during the twelve-month period ending with the date of the sale or other disposition. The regulations permit adjustments to basis that include decreases in basis for depreciation for periods since the acquisition of the property and increases in basis for capitalized improvements or additions.

However, unlike a Self-Directed IRA, in the case of a Solo 401(k) Plan, UBTI does not apply to unrelated debt-financed income. The UDFI rules apply when a 401(k) Plan uses leverage to acquire property such as real estate. Pursuant to Internal Revenue Code Section 514(c)(9), a 401(k) Qualified Plan is not subject to the UDFI rules and, thus, the UBTI tax if nonrecourse leverage is used to acquire property such as real estate.

What is the Unrelated Business Taxable Income Tax Rate?

Internal Revenue Code Section 511 taxes “unrelated business taxable income” (UBTI) at the rates applicable to corporations or Trusts, depending on the organization’s legal characteristics. Generally, UBTI is gross income from an organization’s unrelated trades or businesses, less deductions for business expenses, losses, depreciation, and similar items directly connected therewith.

A Self-Directed IRA subject to UBTI because of the use of nonrecourse financing is taxed at the Trust tax rate because an IRA is considered a Trust. For 2016, a Solo 401(k) Plan subject to UBTI is taxed at the following rates:

  • $0 – $2,500 = 15% of taxable income
  • $2,501 – $5,900 = $375 + 25% of the amount over $2500
  • $5,901 – $9,050 = $1,225 + 28% of the amount over $5,900
  • $9,051 – $12,300 = $2,107 + 33% of the amount over $9,050
  • $12,300 + = $3,179.50 + 39.6% of the amount over $12,300

It is highly advisable to consult with a tax attorney or tax professional, specifically one with a strong understanding of the unrelated debt finance income and unrelated business taxable income rules, before using a Self-Directed IRA to make investments

To learn more about using the Unrelated Business Taxable Income rules, please contact a Self-Directed retirement expert at 1-800-472-1043.

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Jan 26

Do You Pay Tax on a Traditional to Roth IRA Rollover?

Yes. A distribution rolled over to a Roth IRA from a traditional IRA, qualified plan, tax-deferred annuity, or eligible deferred compensation plan is included in gross income (although not adjusted gross income for purposes of the $100,000 ceiling). A traditional IRA can be converted into a Roth IRA, but the conversion is treated as a distribution from the traditional IRA and a rollover contribution to the Roth IRA.

Starting in 2010, everyone qualifies to convert to a Roth IRA. As with any rollover, you will want to arrange a direct rollover from the plan to the Roth IRA to avoid mandatory income tax withholding and not worry about the 60-day window which the transfer must be completed.

Do You Pay Tax on a Traditional to Roth IRA Rollover?A rollover or conversion from a traditional IRA to a Roth IRA is usually advantageous for taxpayers who can pay the resulting tax from other funds. Assume A, who is taxed at 30 percent at all relevant times, converts a traditional IRA containing $100,000 into a Roth IRA and pays the resulting $30,000 tax from other funds. Before the conversion, each dollar of income accumulated in the IRA faced a 30 percent tax on distribution, but the conversion eliminates this prospect. A accomplishes this by effectively investing an additional $30,000, after taxes, in the IRA, but this $30,000 will itself produce earnings within the IRA on which A will never be taxed. The conversion thus has the effect of a $30,000 nondeductible contribution to the Roth IRA, free of the usual annual ceiling on IRA contributions. The conversion is also advantageous if the taxpayer is taxed at a lesser rate for the year of the conversion than is expected in the year or years of ultimate distribution (e.g., because of losses or other large deductions in the year of the rollover or conversion).

If an amount “properly allocable” to a traditional-to-Roth rollover is distributed during the year of the rollover or any of the succeeding four years, the early distribution penalty tax of Internal Revenue Code Section 72(t) applies as if the entire distribution (or, if less, the gross income recognized at the time of the rollover) were included in gross income. The deemed gross income is taxed under Internal Revenue Code Section 72(t) unless the distribution is made after the owner of the IRA attains age 59 1/2 , becomes disabled, or dies or some other exception from the penalty applies.

Please contact one of our Roth IRA Experts at 800-472-0646 for more information.

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Jan 25

Self-Directed IRA Investors Looking to Take Advantage of Real Estate Opportunities in Texas in Light of Dropping Oil Prices

Dropping oil prices could potentially impact Texas real estate markets offering opportunities for self-directed IRA investors.

IRA Financial Group, the leading provider of self-directed IRA LLC solutions, has seen a strong interest from Texas real estate investors looking to invest their self-directed IRA and Solo 401(K) plans into Texas real estate. With oil prices down and nearing ten year lows, some Texas real estate investors are looking to take advantage of real estate opportunities. “We have some interest from real estate investors looking to take advantage of opportunities in the Texas real estate market in light of the falling oil prices,” stated Jacky Ospina, a self-directed retirement specialist with the IRA Financial Group. “Our Texas clients are expecting to see real estate prices decrease in 2016 in light of the recent downturn in the oil market and are hoping to take advantage of buying opportunities,” stated Ms. Ospina.

Self-Directed IRA Investors Looking to Take Advantage of Real Estate Opportunities in Texas in Light of Dropping Oil PricesWith IRA Financial Group’s self directed IRA LLC solution, traditional IRA or Roth IRA funds can be used to buy real estate in a tax-deferred account by simply writing a check. “Even with real estate prices increasing, our clients are still finding attractive real estate IRA opportunities for the self-directed IRA LLC and gaining the opportunity to move quickly on a potential investment, “ stated Susan Glass, a retirement tax specialist with the IRA Financial Group.

The IRA Financial Group was founded by a group of top law firm tax and ERISA lawyers who have worked at some of the largest law firms in the United States, such as White & Case LLP, Dewey & LeBoeuf LLP, and Thelen LLP.

IRA Financial Group proudly announces the latest book titled “The Checkbook IRA” written by tax partner Adam Bergman, which is now available on Amazon. This is the second book in a four-part series on self-directed retirement plans. The first book “Going Solo” is also available on Amazon.

IRA Financial Group is the market’s leading provider of “checkbook control” Self Directed IRA and Solo 401(k) plans. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate without custodian consent.

To learn more about the IRA Financial Group please visit our website at http://www.irafinancialgroup.com or call 800-472-0646.

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Jan 20

IRS-Approved Self Directed IRA Structure

The Self-Directed IRA Structure has been in use for some 35 years, however, the concept of using an entity owned by an IRA to make an investment was first reviewed by the Tax Court in Swanson V. Commissioner 106 T.C. 76 (1996). In Swanson, the Tax Court, in ruling against the IRS, held that the funding of a new entity by an IRA for self-directing assets was a permitted transaction and not prohibited pursuant to Code Section 4975. The Swanson Case was later affirmed by the IRS in Field Service Advice Memorandum (FSA) 200128011. In FSA 200128011, the IRS, in providing guidance to IRS agents for purposes of conducting audits, confirmed the Tax Court’s holding in Swanson and held that a newly established entity owned by an IRA and managed by the IRA owner may make investments using IRA funds without violating the prohibited transaction rules under Internal Revenue Code Section 4975. In October 2013, the Tax Court in T.L. Ellis, TC Memo. 2013-245, Dec. 59,674(M) held that establishing a special purpose limited liability company (“LLC”) to make an investment did not trigger a prohibited transaction, as a newly established LLC cannot be deemed a disqualified person pursuant to Internal Revenue Code Section 4975. The impact of the impact of this ruling is enormous because it directly supports the position that a retirement account can fund a newly established LLC without triggering a prohibited transaction. The Ellis case is decisive because it will silence anyone who claims that using a special purpose LLC to make IRA investments would trigger a prohibited transaction.

When it comes to making IRA investments the IRS does not state which transactions are allowed, but only states what types of transactions are prohibited. The IRA prohibited transaction rules are outlined in Internal Revenue Code Sections 408 & 4975 and generally involve the prohibition against using IRA funds to buy life insurance, collectibles, or enter into any transaction with a “disqualified person”. As per the Internal Revenue Code, a “disqualified person” is generally defined as the IRA holder and any of his or her lineal descendants or any entity controlled by such person(s).

The following is a summary of the key cases & opinion confirming the legality of the Self-Directed IRA LLC:

Swanson V. Commissioner 106 T.C. 76 (1996)

The relevant facts of Swanson are as follows:

1. Mr. Swanson was the sole shareholder of H & S Swansons’ Tool Company (Swansons’ Tool).

2. Mr. Swanson arranged for the organization of Swansons’ Worldwide, Inc. (Worldwide). Mr. Swanson was named as president and director of Worldwide. Mr. Swanson also arranged for the creation of an individual retirement account (IRA #1).

3. Mr. Swanson directed the custodian of his IRA to execute a subscription agreement for 2,500 shares of Worldwide original issued stock. The shares were subsequently issued to IRA #1, which became the sole shareholder of Worldwide.

4. Swansons’ Tool paid commissions to Worldwide with respect to the sale by Swansons’ Tool of export property. Mr. Swanson, who had been named president of Worldwide, directed, with the IRA custodian’s consent, that Worldwide pay dividends to IRA #1.

5. A similar arrangement was set up with regards to IRA #2 and a second corporation called Swansons’ Trading Company.

6. Mr. Swanson received no compensation for his services as president and director of Swansons’ Worldwide, Inc. and Swansons’ Trading Company.

The IRS attacked Mr. Swanson’s IRA transactions on two levels. First, the IRS argued that the payment of dividends from Worldwide to IRA #1 was a prohibited transaction within the meaning of Code Section 4975(c)(1)(E) as an act of self-dealing, where a disqualified person who is a fiduciary deals with the assets of the plan in his own interest. Mr. Swanson argued that he engaged in no activities on behalf of Worldwide which benefited him other than as a beneficiary of IRA #1.

The Tax Court ruled for Mr. Swanson, and found that the IRS was not substantially justified in its position. The court said that section 4975(c)(1)(E) addresses itself only to acts of disqualified persons who, as fiduciaries, deal directly or indirectly with the income or assets of a plan for their own benefit or account. In Mr. Swanson’s case the court found that there was no such direct or indirect dealing with the income or assets of the IRA. The IRS never suggested that Mr. Swanson, acting as a “fiduciary” or otherwise, ever dealt with the corpus of IRA #1 for his own benefit. The Tax Court, in holding for Swanson, stated the following:

“We find that it was unreasonable for [the IRS] to maintain that a prohibited transaction occurred when Worldwide’s stock was acquired by IRA #1. The stock acquired in that transaction was newly issued — prior to that point in time, Worldwide had no shares or shareholders. A corporation without shares or shareholders does not fit within the definition of a disqualified person under section 4975(e)(2)(G). It was only after Worldwide issued its stock to IRA #1 that petitioner held a beneficial interest in Worldwide’s stock, thereby causing Worldwide to become a disqualified person under section 4975(e)(2)(G). . .  Therefore, [the IRS’] litigation position with respect to this issue was unreasonable as a matter of both law and fact.”

Therefore, the Tax Court held that the only direct or indirect benefit that Mr. Swanson realized from the payments of dividends by Worldwide related solely to his status as a participant of IRA #1. In this regard, Mr. Swanson benefited only insofar as IRA #1 accumulated assets for future distribution.

The second issue the IRS raised was that the sale of stock by Worldwide to Mr. Swanson’s IRA was a prohibited transaction within the meaning of section 4975(c)(1)(A) of the Code, which prohibits the direct or indirect sale or exchange, or leasing, of any property between an IRA and a disqualified person. Mr. Swanson argued that at all relevant times IRA #1 was the sole shareholder of Worldwide, and that since the 2,500 shares of Worldwide issued to IRA #1 were original issue, no sale or exchange of the stock occurred.

IRS-Approved Self Directed IRA StructureOnce again, the tax court agreed with Mr. Swanson. The critical factor was that the stock acquired in that transaction was newly issued – prior to that point in time, Worldwide had no shares or shareholders. The court found that a corporation without shares or shareholders does not fit within the definition of a disqualified person under section 4975(e)(2)(G). It was only after Worldwide issued its stock to IRA #1 that Swanson held a beneficial interest in Worldwide’s stock, thereby causing Worldwide to become a disqualified person. Accordingly, the issuance of stock to IRA #1 did not, within the plain meaning of section 4975(c)(1)(A), qualify as a “sale or exchange, or leasing, of any property between a plan and a disqualified person”.

The significance of the Swanson ruling was that the Tax Court approved the investment of IRA funds into a newly established entity that is managed by the IRA account holder. In ruling in favor or Mr. Swanson, the Tax Court formally approved the idea of an IRA holder being the sole director and officer of an entity owned by his IRA. In other words, the tax court endorsed a transaction whereby IRA funds are invested in a newly established entity such as a limited liability company of which the IRA owner is the manager. The Swanson Case clearly suggests that as long as the entity is newly established, the investment of IRA funds into that entity would not be treated as a prohibited transaction pursuant to Internal Revenue Code Section 4975.

IRS Field Service Advice Memorandum 200128011

IRS Field Service Advice (FSA) Memorandum 200128011 was the first IRS drafted opinion that confirmed the ruling of Swanson that held that the funding of a new entity by an IRA for self-directing assets was not a prohibited transaction pursuant to Code Section 4975.

An FSA is issued by the IRS to IRS field agents to guide them in the conduct of tax audits.

USCorp is a domestic sub-chapter S Corporation. Father owns a majority of the shares of USCorp. Father’s three minor children own the remaining shares of USCorp equally. USCorp is in the business of selling Product A and some of its sales are made for export.

Father and each child own separate IRAs. Each of the four IRAs acquired a 25% interest in FSC A, a foreign sales corporation (“FSC”). USCorp entered into service and commission agreements with FSC A. FSC A agreed to act as commission agent in connection with export sales made by USCorp, in exchange for commissions based upon the administrative pricing rules applicable to FSCs. USCorp also agreed to perform certain services on behalf of FSC A, such as soliciting and negotiating contracts, for which FSC A would reimburse USCorp its actual costs.

During Taxable Year 1, FSC A made a cash distribution to its IRA shareholders, out of earnings and profits derived from foreign trade income relating to USCorp exports. The IRAs owning FSC A each received an equal amount of funds.

IRS advised that, based on Swanson, neither issuance of stock in FSC to IRAs nor payment of dividends by FSC to IRAs constituted direct prohibited transaction. o IRS warned that, based on facts, transaction could be indirect.

In light of Swanson, the IRS concluded that a prohibited transaction did not occur under Code Section 4975(c)(1)(A) in the original issuance of the stock of FSC A to the IRAs. Similarly, the IRS held that payment of dividends by FSC A to the IRAs in this case is not a prohibited transaction under Code Section 4975(c)(1)(D). The IRS further concluded that in light of Swanson, the ownership of FSC A stock by the IRAs, together with the payment of dividends by FSC A to the IRAs, should not constitute a prohibited transaction under Code Section 4975(c)(1)(E).

The significance of FSA 200128011 is that the IRS confirmed the Tax Court’s ruling in Swanson, which ruled against the IRS. Like Swanson, the FSA advised IRS agents conducting audits that the creation and ownership of a new entity by an IRA for investment purposes would not be considered a prohibited transaction under Code Section 4975. Furthermore, the IRS established that the payments of dividends by an IRA owned entity to an IRA would not constitute a prohibited transaction. Like the Tax Court in Swanson, the IRS concluded that an investment into a newly established entity to make IRA investments would not be a prohibited transaction pursuant to Internal Revenue Code Section 4975. The IRS, in confirming the Tax Court’s ruling in Swanson, seemed to suggest that the focus on whether a transaction is prohibited pursuant to IRS rules should be examined based on how IRA funds are invested not on the structure used to effect the investment. In other words, the type of investment made with IRA funds once contributed to the newly formed entity will determine whether the transaction is prohibited under Internal Revenue Code Section 4975, not the vehicle that was used to make the investment.

T.L. Ellis, TC Memo. 2013-245, Dec. 59,674(M)

On October 29, 2013, the Tax Court in T.L. Ellis, TC Memo. 2013-245, Dec. 59,674(M), held that establishing a special purpose limited liability company (“LLC”) to make an investment did not trigger a prohibited transaction, as a newly established LLC cannot be deemed a disqualified person pursuant to Internal Revenue Code Section 4975.

In TC Memo. 2013-245, Mr. Ellis retired with about $300,000 in his section 401(k) retirement plan, which he subsequently rolled over into a newly created self-directed IRA.

The taxpayer then created an LLC taxed as a corporation and had his IRA transfer the $300,000 into the LLC. The LLC was formed to engage in the business of used car sales. The taxpayer managed the used car business through the IRA LLC and received a modest salary.

The IRS argued that the formation of the LLC was a prohibited transaction under section 4975, which prohibits self-dealing. The Tax Court disagreed, holding that even though the taxpayer acted as a fiduciary to the IRA (and was therefore a disqualified person under section 4975), the LLC itself was not a disqualified person at the time of the transfer. After the transfer, the LLC was a disqualified person because it was owned by the Mr. Ellis’s IRA, a disqualified person. Additionally, the IRS also claimed that the taxpayer had engaged in a prohibited transaction by receiving a salary from the LLC. The court agreed with the IRS. Although the LLC (and not the IRA) was officially paying the taxpayer’s salary, the Tax Court concluded that since the IRA was the sole owner of the LLC, and that the LLC was the IRA’s only investment, the taxpayer (a disqualified person) was essentially being paid by his IRA.

The impact of the Tax Court’s ruling in TC Memo. 2013-245 is significant because it directly confirms the legality of the self-directed IRA LLC solution by validating that a retirement account can fund a newly established LLC without triggering a prohibited transaction. The Tax Court’s decision in TC Memo. 2013-245 is important because it will silence the small percentage of people still trying to deny the legality of the self-directed IRA LLC solution even after the Swanson Case and the 2001 IRS opinion letter confirmed its validity.

In many respects the Tax Court’s ruling in TC Memo. 2013-245 is more important than the Swanson ruling and IRS advisory opinion. Firstly, TC Memo. 2013-245 is the first case that directly reinforces the legality of using a newly established LLC to make IRA investments without triggering an IRS prohibited transaction. The Swanson case as well as IRS Advisory opinion involved a corporation, not a LLC. Secondly, TC Memo. 2013-245 demonstrates the importance of working with specialized tax professionals who have the necessary expertise regarding the IRS prohibited transaction rules before establishing a self-directed IRA “checkbook control” structure. If Mr. Ellis has worked with the IRA Financial Group to establish his “checkbook control” IRA LLC, he would have been told that he could have used an LLC to make an investment in the LLC business, although, the investment would have to be 100% passive and he would not have been able to be involved in the business in any way, including earning a salary.

Conclusion

In light of Swanson, FSA 200128011, and TC Memo. 2013-245 the establishment and funding of a new LLC by an IRA for purposes of making IRS approved investments will not be considered a prohibited transaction under Internal Revenue Code Section 4975.

For additional information on the Self-Directed IRA LLC structure, please contact one of our IRA Experts at 800-472-0646.

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Jan 19

The Advantages of Using the Rollover Business Start-up vs. an SDIRA to Buy a Business

The Business Acquisition & Compliance Solution Structure (BACSS) also known as the “Rollover Business Start-Up” (“ROBS”) Solution is an IRS and ERISA approved structure that allows an individual to purchase a new or existing business with retirement funds and be active in the business without triggering any of the IRS prohibited transaction rules. The ROBS solution qualifies for a special exemption set forth under IRC 4975(d) to certain prohibited transaction rules, which do not apply to a Self-Directed IRA structure.

How Does the ROBS structure work?

The ROBS arrangement typically involves rolling over a prior IRA or 401(k) plan account into a newly established 401(k) plan, which a start-up C Corporation business sponsored, and then investing the rollover 401(k) Plan funds in the stock of the new C Corporation. The funds are then deposited in the C Corporation bank account and are available for use for business purposes.

The following is how a typical ROBS structure works:

  • 1. Jim, an entrepreneur or existing business owner, establishes a new C Corporation in the state where the business will be operating. The ROBS structure must involve a C Corporation and not an LLC or S Corporation because the exemption to the IRS prohibited transaction rules under IRC 4975(d) involves the purchase of “Qualifying Employer Securities”, which is defined as stock of a Corporation. Using an LLC would not satisfy this definition and only individuals can be shareholders of an S Corporation and a 401(k) Plan is a trust.
  • 2. The new C Corporation adopts a prototype 401(k) plan that specifically permits the plan participants, including Jim, to direct the investment of their plan accounts into a selection of investments options, including employer stock, also known as “qualifying employer securities.
  • 3. Jim elects to participate in the new 401(k) plan and, as permitted by the plan, directs a rollover of a prior employer’s 401(k) Plan funds into the newly adopted 401(k) plan.
  • 4. Jim then directs the investment of his or her 401(k) plan account to purchase the C Corporation’s newly issued stock at fair market value (i.e., the amount that Jim wishes to invest in the new business).
  • 5. Jim also invests personal funds equal to more than 1% of the purchase price so that the structure is not considered an Employee Stock Option Plan (ESOP).
  • 6. The C Corporation utilizes the proceeds from the sale of stock (the amount of rollover funds and personal funds used) to purchase the assets for the new business.
  • 7. Joe would be able to earn a salary from the revenues of the business as well as personally guarantee any business loan.

What is the Difference between using a Self-Directed Vs. ROBS structure to buy a business?

In a lot of respects, using a Self-Directed IRA LLC or a 401(k) Plan to purchase stock in a corporation would seem to be subject to the same rules. However, as described above, using 401(k) Plan funds and not IRA funds allows one to take advantage of the prohibited transaction exemption under IRC 4975(d) for “Qualifying Employer Securities.”

The Advantages of Using the Rollover Business Start-up vs. an SDIRA to Buy a BusinessThe recent U.S. Tax Court case Peek v. Commissioner, 140 T.C. No. 12 (May 9, 2013), highlights the risk and limitations involved when using a Self-Directed IRA to purchase business assets. In the Peek case, the taxpayers used IRA funds to invest in a corporation that ultimately purchased business assets. Because Mr. Peek used an IRA and not a 401(k) Plan to purchase the C Corporation stock, Mr. Peek was not able to earn a salary or personally guarantee a business loan, which ultimately was the cause of the IRS prohibited transaction rule violation.

The limitation of using a Self-Directed IRA LLC to buy a business is that the individual retirement account business owner would not be able to be actively involved in the business, earn a salary, or even personally guarantee a business loan. Whereas, if the business owner used a ROBS strategy, that individual would be able to be actively involved in the business, earn a salary, as well as personally guarantee a business loan without triggering the IRS prohibited transaction rules.

To learn more about the benefits of the ROBS strategy, please contact a retirement tax expert at 800-472-0646.

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Jan 15

Using Your Self Directed Roth IRA to Invest in Real Estate

It's Time To Let 401(k) Holders Invest Like the Pros Most people mistakenly believe that their Roth IRA must be invested in bank CDs, the stock market, or mutual funds. Few Investors realize that the IRS has always permitted real estate to be held inside IRA retirement accounts. Investments in real estate with a Self-Directed Roth IRA LLC are fully permissible under the Employee Retirement Income Security Act of 1974 (ERISA). IRS rules permit you to engage in almost any type of real estate investment, aside generally from any investment involving a disqualified person.

In addition, the IRS states the following on their website: “…..IRA law does not prohibit investing in real estate but trustees are not required to offer real estate as an option.”

Advantages of Using a Self-Directed Roth IRA LLC to Purchase Real Estate

Income or gains generated by a Roth IRA generate tax-free profits. Using a Self-Directed Roth IRA LLC to purchase real estate allows Using a Self Directed Roth IRA LLC To Purchase Real Estatethe Roth IRA to earn tax-free income/gains and never pay taxes on any future date, rather than in the year the investment produces income.

With a Self-Directed IRA Roth LLC, you can invest tax-free and not have to pay taxes ever! All the income or gains from your real estate deals flow though to your Roth IRA tax-free!

Types of Real Estate Investments

Below is a partial list of domestic and foreign real estate-related investments that you can make with a Self-Directed Roth IRA LLC:

  • Raw land
  • Residential homes
  • Commercial property
  • Apartments
  • Duplexes
  • Condos/townhomes
  • Mobile homes
  • Real estate notes
  • Real estate purchase options
  • Tax liens certificates
  • Tax deeds
  • Farm land
  • Any domestic or foreign real property

Investing in Real Estate with a Self-Directed Roth IRA LLC is Quick & Easy!

Purchasing real estate with a Self-Directed Roth IRA LLC is essentially the same as purchasing real estate personally.

  • Set-up a Self-Directed Roth IRA LLC with the IRA Financial Group
  • Identify the investment property
  • Purchase the investment property with the Self-Directed Roth IRA LLC. As manager of the Self-Directed Roth IRA LLC, you will not be required to seek the consent of the custodian to make a real estate investment providing you with “checkbook control” over your Roth IRA funds.
  • Title to the investment property and all transaction documents should be in the name of the Roth IRA LLC. Documents pertaining to the property investment must be signed by the LLC manager (you).
  • All expenses paid from the investment property go through the Self-Directed Roth IRA LLC. Likewise, all rental income checks must be deposited directly in to the Self-Directed Roth IRA LLC bank account. No Roth IRA related investment checks should be deposited into your personal accounts and no Roth IRA funds should be deposited into your personal account.
  • All income or gains from the investment flow through to the Roth IRA tax-free!

Tax Advantages of Using a Self-Directed Roth IRA LLC!

Using a Self-Directed Roth IRA LLC to make real estate investments presents a number of exciting tax planning opportunities.

The primary advantage of using a Self-Directed Roth IRA LLC to make real estate investments is that all income and gains associated with the Roth IRA real estate investment grow tax-free and will not be subject to tax upon withdrawal or distribution. This is because unlike traditional IRAs, you are generally not subject to any tax upon taking Roth IRA distributions once you reach the age of 59 1/2.

Structuring the Purchase of Real Estate with a Self-Directed Roth IRA LLC

When using a Self-Directed Roth IRA LLC to make a real estate investment there are a number of ways you can structure the transaction:

1. Use your Self-Directed Roth IRA LLC funds to make 100% of the investment

If you have enough funds in your Self-Directed Roth IRA LLC to cover the entire real estate purchase, including closing costs, taxes, fees, insurance, you may make the purchase outright using your Self-Directed Roth IRA LLC. All ongoing expenses relating to the real estate investment must be paid out of your Self-Directed Roth IRA LLC bank account. In addition, all income or gains relating to your real estate investment must be returned to your Self-Directed Roth IRA LLC bank account.

2. Partner with Family, Friends, Colleagues

If you don’t have sufficient funds in your Self-Directed Roth IRA LLC to make a real estate purchase outright, your Self-Directed Roth IRA LLC can purchase an interest in the property along with a family member (non-disqualified person – any family member other than a parent, child, spouse, daughter-in-law, son-in–law), friend, or colleague. The investment would not be made into an entity owned by the IRA owner, but instead would be invested directly into the property.

For example, your Self-Directed Roth IRA LLC could partner with a family member (non disqualified person – any family member other than a parent, child, spouse, daughter-in-law, son-in–law), friend, or colleague to purchase a piece of property for $150,000. Your Self-Directed Roth IRA LLC could purchase an interest in the property (i.e. 50% for $75,000) and your family member, friend, or colleague could purchase the remaining interest (i.e. 50% for $75,000).

All income or gain from the property would be allocated to the parties in relation to their percentage of ownership in the property. Likewise, all property expenses must be paid in relation to the parties’ percentage of ownership in the property. Based on the above example, for a $2,000 property tax bill, the Self-Directed Roth IRA LLC would be responsible for 50% of the bill ($1000) and the family member, friend, or colleague would be responsible for the remaining $1000 (50%).

Isn’t Partnering with a family member in a Real Estate Transaction a Prohibited Transaction?

Likely no if it the transaction is structured correctly. Investing in an investment entity with a family member and investing in an investment property directly are two different transaction structures that impact whether the transaction will be prohibited under Code Section 4975. The different tax treatment is based on who currently owns the investment. Using a Self-Directed Roth IRA LLC to invest in an entity that is owned by a family member who is a disqualified person will likely be treated as a prohibited transaction. However, partnering with a family member that is a disqualified person directly into an investment property would likely not be a prohibited transaction. Note: If you, a family member, or other disqualified person already owns a property, then investing in that property with your Self-Directed Roth IRA LLC would be prohibited.

3. Borrow Money for your Self-Directed Roth IRA LLC

You may obtain financing through a loan or mortgage to finance a real estate purchase using a Self-Directed Roth IRA LLC. However, two important points must be considered when selecting this option:

  • Loan must be non-recourse – A “prohibited transaction” is a transaction that, directly or indirectly involves the loan of money or other extension of credit between a plan and a disqualified person. Normally, when an individual purchases real estate with a mortgage, the traditional loan provides for recourse against the borrower (i.e., personal liability for the mortgage). However, if the IRA purchases real estate and secures a mortgage for the purchase, the loan must be non-recourse; otherwise this will be a prohibited transaction. A non-recourse loan only uses the property for collateral. In the event of default, the lender can collect only the property and cannot go after the IRA itself.
  • Tax is due on profits from leveraged real estate – Pursuant to Code Section 514, if your Self-Directed Roth IRA LLC uses non-recourse debt financing (i.e., a loan) on a real estate investment, some portion of each item of gross income from the property are subject to Unrelated Business Income Tax (UBIT). Debt-financed property” refers to borrowing money to purchase the real estate (i.e., a leveraged asset that is held to produce income). In such cases, only the income attributable to the financed portion of the property is taxed; gain on the profit from the sale of the leveraged assets is also UDFI (unless the debt is paid off more than 12 months before the property is sold). There are some important exceptions from UBIT: those exclusions relate to the central importance of investment in real estate – dividends, interest, annuities, royalties, most rentals from real estate, and gains/losses from the sale of real estate. However, rental income generated from real estate that is “debt financed” loses the exclusion, and that portion of the income becomes subject to UBIT. Thus, if the IRA borrows money to finance the purchase of real estate, the portion of the rental income attributable to that debt will be taxable as UBIT.

For example, if the average acquisition indebtedness is $50 and the average adjusted basis is $100, 50 percent of each item of gross income from the property is included in UBTI.

A Self-Directed Roth IRA LLC subject to UBTI is taxed at the trust tax rate because an IRA is considered a trust. For 2016, a Self-Directed Roth IRA LLC subject to UBTI is taxed at the following rates:

  • $0 – $2,500 = 15% of taxable income
  • $2,501 – $5,900 = $375 + 25% of the amount over $2500
  • $5,901 – $9,050 = $1,225 + 28% of the amount over $5,900
  • $9,051 – $12,300 = $2,107 + 33% of the amount over $9,050
  • $12,300 + = $3,179.50 + 39.6% of the amount over $12,300

The IRA Financial Group will take care of the entire setup of your Self-Directed Roth IRA LLC “Checkbook Control” structure. The whole process can be handled by phone, email, fax, or mail and typically takes between 7-21 days to complete, the timing largely depending on the state of formation and the custodian holding your retirement funds. Our IRA experts and tax and ERISA professionals are onsite greatly reducing the setup time and cost. Most importantly, each client of the IRA Financial Group is assigned a retirement tax professional to help with the establishment of the Self-Directed Roth IRA LLC “Checkbook Control” structure. You will find that our fee for this service is significantly less than other companies that perform the same or similar services.

To learn more about using a Self-Directed Roth IRA LLC to invest in real estate, please contact one of our Self-Directed Roth IRA Experts at 800-472-0646 for more information.

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Jan 13

Investments for Your Self Directed IRA

A Self-Directed IRA LLC offers one the ability to use his or her retirement funds to make almost any type of investment on their own without requiring the consent of any custodian or person. The IRS only describes the type of investments that are prohibited, which are very few.

The following are some examples of types of investments that can be made with your Self-Directed IRA LLC:

  • Residential or commercial real estate
  • Domestic or Foreign real estate
  • Raw land
  • Foreclosure property
  • Mortgages
  • Mortgage pools
  • Deeds
  • Private loans
  • Tax liens
  • Private businesses
  • Limited Liability Companies
  • Limited Liability Partnerships
  • Private placements
  • Precious metals and certain coins
  • Stocks, bonds, mutual funds
  • Foreign currencies

Using a Self-Directed IRA LLC to make investments offers the investor the ability to make traditional as well as non-traditional investments, such as real estate, in a tax-efficient manner.

For additional information on the advantages of using a Self-Directed IRA LLC with “checkbook control” to make investments, please contact one of our IRA Experts at 800-472-0646.

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Jan 11

Investing in Coins with a Self Directed IRA LLC

The IRS does not list the type of assets or investments that may be purchased with retirement funds, but does indicate which categories of assets or investments are not permitted.

The categories of transactions that are not permitted to be purchased using a Self-Directed IRA LLC can be found in Internal Revenue Code Sections 408 & 4975.

When it comes to coins or metals, Internal revenue Code Section 408 is generally the provision that applies. In general, collectibles such as artworks, rugs, stamps, certain coins, beverages and antiques, etc. are not allowed within a Self-Directed IRA LLC, pursuant to Internal Revenue Code Section 408.

Internal Revenue Code Section 408 is specific as to what defines a collectible. Some notable exceptions are allowed for certain gold (such as American Eagle) and silver coins and any coins issued by a state. Legislation in 1997 further liberalized the rules for IRAs by making reference to specific definitions of acceptable coins in USCS, title 31; IRC sections 5112(a), (e) and (k); the Commodity Exchange Act; and IRC section 408(m)(3).

This change, in general, resulted in a windfall for individual collectors as well as coin and precious metal dealers (all of the coins allowed must be minted by the U.S. government or the states).

The Law

Internal Revenue Code Section 408(m):

(3) Exception for certain coins and bullion

For purposes of this subsection, the term “collectible” shall not include —

(A) any coin which is —

(i) a gold coin described in paragraph (7), (8), (9), or (10) of section 5112 (a) of title 31, United States Code,

(ii) a silver coin described in section 5112 (e) of title 31, United States Code,

(iii) a platinum coin described in section 5112 (k) of title 31, United States Code, or

(iv) a coin issued under the laws of any State, or

(B) any gold, silver, platinum, or palladium bullion of a fineness equal to or exceeding the minimum fineness that a contract market (as described in section 7 of the Commodity Exchange Act, 7 U.S.C. 7) requires for metals which may be delivered in satisfaction of a regulated futures contract if such bullion is in the physical possession of a trustee described under subsection (a) of this section.

Subsection (a) states:

(a) Individual retirement account

For purposes of this section, the term “individual retirement account” means a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries, but only if the written governing instrument creating the trust meets the following requirements:

(1) Except in the case of a rollover contribution described in subsection (d)(3) in section 402 (c), 403 (a)(4), 403 (b)(8), or 457 (e)(16), no contribution will be accepted unless it is in cash, and contributions will not be accepted for the taxable year on behalf of any individual in excess of the amount in effect for such taxable year under section 219 (b)(1)(A).

(2) The trustee is a bank (as defined in subsection (n)) or such other person who demonstrates to the satisfaction of the Secretary that the manner in which such other person will administer the trust will be consistent with the requirements of this section.

(3) No part of the trust funds will be invested in life insurance contracts.

(4) The interest of an individual in the balance in his account is non-forfeitable.

(5) The assets of the trust will not be commingled with other property except in a common trust fund or common investment fund.

(6) Under regulations prescribed by the Secretary, rules similar to the rules of section 401 (a)(9) and the incidental death benefit requirements of section 401 (a) shall apply to the distribution of the entire interest of an individual for whose benefit the trust is maintained.

Hence, it is clear that in the case of physical metals, such as gold, the metals must be held in the physical possession of a U.S. trust (i.e. bank or depository), however, the “physical possession” requirement does not appear to relate to the possession of coins. A more detailed analysis will follow below.

31 U.S.C. 5112 refers to Denominations, specifications and design of coins.

(a) The Secretary of the Treasury may mint and issue only the following coins:

(1) a dollar coin that is 1.043 inches in diameter.

(2) a half dollar coin that is 1.205 inches in diameter and weighs 11.34 grams.

(3) a quarter dollar coin that is 0.955 inch in diameter and weighs 5.67 grams.

(4) a dime coin that is 0.705 inch in diameter and weighs 2.268 grams.

(5) a 5-cent coin that is 0.835 inch in diameter and weighs 5 grams.

(6) except as provided under subsection (c) of this section, a one-cent coin that is 0.75 inch in diameter and weighs 3.11 grams.

(7) A fifty dollar gold coin that is 32.7 millimeters in diameter, weighs 33.931 grams, and contains one troy ounce of fine gold.

(8) A twenty-five dollar gold coin that is 27.0 millimeters in diameter, weighs 16.966 grams, and contains one-half troy ounce of fine gold.

(9) A ten dollar gold coin that is 22.0 millimeters in diameter, weighs 8.483 grams, and contains one-fourth troy ounce of fine gold.

(10) and contains one-tenth troy ounce of fine gold.

(e) Notwithstanding any other provision of law, the Secretary shall mint and issue, in quantities sufficient to meet public demand, coins which —

(1) are 40.6 millimeters in diameter and weigh 31.103 grams;

(2) contain .999 fine silver;

(3) have a design —

(A) symbolic of Liberty on the obverse side; and

(B) of an eagle on the reverse side;

(k) The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.

How do I hold IRS Approved Coins with a Self-Directed IRA LLC?

Now that you have a clear idea of the types of coins that the IRS allows to be purchased using retirement funds, the next questions becomes how can the coins be held without violating IRS rules.

Investing in Coins with a Self Directed IRA LLCMost people don’t realize that a coin can be treated as bullion. As a result, based on the language in IRC 408(m)(3)(B), all coins defined in IRC 408(m), including American Eagle and State minted coins must be held in the ‘physical possession’ of a U.S. trustee, just like all precious metals (i.e. pure gold and silver bars). Since IRS approved coins, such as American Eagle and State minted coins are considered bullion for purposes of Internal Revenue Code Section 408(m), all IRS approved coins, just like precious metals, should be held in the “physical possession” of a U.S. bank or depository.

Although, bullion may be cast into bars or minted into coins. The defining attribute of bullion is that it is valued by its mass and purity rather than by a face value as money. Hence, it appears that the “physical possession” requirement outlined for bullion in IRC 408(m)(3)(B) does pertain to coins, such as American Eagle coins, as defined in IRC 408(m)(3)(A), since they can be defined as bullion. That being said, it is best for retirement account holders to hold all IRS approved coins outlined in IRC 408(m) at a depository or bank safe deposit box and not in their personal possession. It is best practice to hold all IRS approved coins at a bank or depository, including the American Eagle and State minted coins.

Holding IRS Approved Coins in a Safe Deposit Box

IRC Section 408(m) clearly states that gold, silver, or palladium bullion, which includes IRS approved coins, must be held in the physical possession of a U.S. trustee, otherwise known as a U.S. bank or financial institution.

Here is the exact language from the tax code under IRC 408(m)(3)(B):

“Any gold, silver, platinum, or palladium bullion of a fineness equal to or exceeding the minimum fineness that a contract market (as described in section 7 of the Commodity Exchange Act, U.S.C.) requires for metals which may be delivered in satisfaction of a regulated futures contract, if such bullion is in the physical possession of a trustee described under subsection (a) of this section.”

The tax code clearly states that any IRS approved metals (bullion) must be held in the physical possession of a trustee, which we now know means a U.S. bank. So the question then becomes is whether holding IRS approved coins (bullion) in a safe deposit box at a U.S. bank in the name of the Self-Directed IRA LLC or Solo 401(k) plan that would be considered to be in the ‘physical possession’ of a U.S. trustee or bank and satisfy the definition under IRC 408(m)?

An argument can then be made that holding precious metals (bullion) at a U,S. bank safe deposit box would not be considered to be in the physical possession of the IRA holder since the bullion will physically be held in a safe deposit box of the bank in the name of the IRA LLC or Solo 401(k) plan. However, the safe deposit box is in the constructive control of the Self-Directed IRA LLC manager or Solo 401(k) plan trustee. That being said, the Internal Revenue Code under Section 408 clearly states ‘physical possession’ and not possession or ‘constructive control.’ From a legal standpoint, possession is not defined to represent control, meaning you can be in possession of an item but not in control or ownership of it. Therefore, many tax practitioners take the position that holding bullion in a safe deposit box in the name of the Self-Directed IRA LLC or Solo 401(k) plan would satisfy the ‘physical possession’ requirement under Internal Revenue Code Section 408(m).”

Unfortunately there is no IRS guidance on this. What is clear is that, IRS approved precious metals should not be stored in the home or personal possession of the Self-Directed IRA holder. It is good practice to hold IRS approved precious metals or coins owned by a retirement account at an IRS approved depository where it is clearly in the ‘physical possession’ of a US Bank (trustee as defined under IRC 408(a).

To learn more about purchasing and holding coins with a Self-Directed IRA LLC, please contact one our tax professionals at 800-472-0646.

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Jan 06

Real Estate Most Successful Investment for Self-Directed IRA Investors in 2015

With equity markets and precious metals all down, real estate and hard money lending investments were the most successful for IRA Financial Group clients in 2015

IRA Financial Group, the leading provider of “checkbook control” self-directed IRA and solo 401(k) plan solutions, reports that based on a survey of self-directed IRA clients in December 2015, real estate and hard money investments were the most successful for self-directed IRA and Solo 401(k) plan clients in 2015. With all major equity markets in the negative in 2015, except NASDAQ, and with all precious metals down at least 10% in 2015, self-directed retirement investors turned to real estate as a safe haven. “The findings of our client survey is not surprising considering where the equity markets were all of 2015 and how challenging the precious metals and oil markets were,” stated Adam Bergman, a partner with the IRA Financial Group. “Based off many financial experts, we expect real estate and hard money lending to stay hot in 2016 for self-directed IRA and solo 401(k) plan investors,” added Mr. Bergman.

Real Estate Most Successful Investment for Self-Directed IRA Investors in 2015The IRA Financial Group was founded by a group of top law firm tax and ERISA lawyers who have worked at some of the largest law firms in the United States, such as White & Case LLP, Dewey & LeBoeuf LLP, and Thelen LLP.

IRA Financial Group is the market’s leading provider of “checkbook control” Self Directed IRA and Solo 401(k) plans. IRA Financial Group has helped thousands of clients make IRA real estate investments.

IRA Financial Group proudly announces the latest book titled “The Checkbook IRA” written by tax partner Adam Bergman, which is now available on Amazon. This is the second book in a four-part series on self-directed retirement plans. The first book “Going Solo” is also available on Amazon.

To learn more about the IRA Financial Group please visit our website at http://www.irafinancialgroup.com or call 800-472-0646.

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