As much as it pains me, LOL, today Quest IRA, Inc., a leading provider of self-directed IRAs, announced that Nathan Long has been named Chief Executive Officer (CEO) and will be relinquishing his Executive Vice President title. Nathan Long has been with Quest for the past five years and is the brother of President/Owner of Quest IRA, Inc. H. Quincy Long.
Click the image below to read the Press Release on PRWeb
Question: Hello Quincy, hope all is well with you. I need some guidance in putting a small 20 unit apartment complex deal together at around $600K. On August 1, 2012, I will be given my $105,000 401K funds that I will be transferring over to you because my company is being bought out. Is there any way for me to use these funds towards purchasing this apartment complex? I have a private investor with a 100k self -directed IRA available to me, but the bank is not going to allow a second on the property and they are going to require that the 30% come from me. I am sure that in all your daily dealings you probably see this kind of scenario pop up and that is why I need your advise in structuring this deal? I will more then likely need around 30% ($180,000) to put this deal together which I have available if I include the 401K funds. This property will be held in a LP which is already established, please let me know if there is any other information that you need.
Answer: Regarding the transfer of your 401(k), I assume you will be choosing to do a direct rollover into your IRA. If you take the funds as a distribution and then roll them over they are required to withhold 20% and send it to the government. If you wish to rollover the entire amount, then you would be required to pull the 20% out of your pocket and get credit on your next tax return. Not a good idea. With a direct rollover the check is made out directly to Quest IRA, Inc. FBO Client Name IRA #[Acccount #]. If you need help with that part, let our new accounts department know and they will be happy to guide you.
As far as the structure of the deal, mixing your personally with your IRA is going to be difficult if not impossible to do without violating the rules. The reason for this is that you cannot benefit personally from your IRA’s investments (except of course when you take distributions from your IRA). Also, you cannot personally guarantee any indebtedness of your IRA. This means, for example, that you cannot purchase the property in an LP owned partly by your 401(k) and partly by yourself personally, since the bank would require a personal guarantee from you for the entire loan amount.
Also, even if you found a way to get the deal done with a loan from the bank which was non-recourse (is this possible?), the investment would generate unrelated business income and your IRA may be subject to taxation. This may be okay if the investment is profitable enough, but you do have to take the taxation into account when deciding whether or not to do the deal. I have a couple of investments that cause my 401(k) plan to file a tax return and sometimes to pay taxes, but they are such good deals that I find the after-tax returns to be well worth it.>>
You can call me or Nathan Long anytime you like if you need more information, although Quest IRA, Inc. cannot give you tax, legal or investment advice. Have a great day & hope that helps!
Follow Up Question: Thanks for the information, I was not sure how I should do the roll over to Questira. If my final goal is to turn this 401k into a Roth Ira to grow tax free, I roll it over to Quest Ira as a distribution minus 20% to government and I am done? Then this should not effect my income taxes for 2012 since I left the 20% distribution fee behind, is this correct? I know you cannot give tax or legal advise, but I just want to know the possible consequences depending on what I decide to do with the money.
Follow Up Answer: It doesn’t quite work that way. The amount you convert to a Roth IRA is simply added to your taxable income for the year. For example, if you have $100,000 in taxable income in 2012 and convert $100,000, now you have to pay taxes as if you made $200,000 of taxable income. So obviously the higher your marginal tax bracket the higher your taxes will be on the conversion. The 20% withholding for a distribution from your 401(k) is just like a down payment on your taxes. Ironically you are both taxed and penalized on that money that is sent to the government! You are always better off doing a direct rollover and then next year, if you absolutely have to, you can remove some money from the Roth IRA to pay taxes on the conversion. In this case you would still have to pay the 10% premature distribution penalty next year unless you had a Roth IRA previously and were removing your contributions and/or previous Roth conversion money that had been in the account for at least 5 years.
Follow Up to the Follow Up: Wow!! I do not see how u keep up with this stuff, but I am glad u are able to explain it in plain English for my comprehension. I will just rollover my 401k to you and figure out what I might want to do later. Thank you so much for spending the time.
Question: Quincy – Just did an IRA Class in Orange County, CA with Pete. Had 80 paid attendees which was pretty good.
Had a lady with a house owned by her IRA approached me about making a loan for her IRA. The attached exemption says a non-recourse loan can be made by her to the IRA if she doesn’t charge interest. But as I read it, the loan can only be for 3 days. Do you have any experience of insight on this exemption?
Answer: Yes, I am familiar with it, at least tangentially. You are not looking at the most current version, which I have attached. You will note that it says:
“On December 15, 2004, the Department proposed to remove the three-day duration limit that applied to loans engaged in under PTE 80-26 for a purpose incidental to the ordinary operation of a plan. The Department recognizes that broadening the scope of the exemption in this manner would greatly benefit plans facing liquidity problems. The Department believes that plans will be adequately protected regarding such loans, i.e., loans for a purpose incidental to the ordinary operation of a plan where such loans have durations that exceed three days, to the extent the conditions of the class exemption, as amended herein, have been met. Accordingly, the Department has determined that the effective date of the amendment will be December 15, 2004; the date the proposed amendment was published in the Federal Register.”
“Section IV. Prospective General Exemption
Effective as of December 15, 2004, the restrictions of section 406(a)(1)(B) and (D) and section 406(b)(2) of the Act, and the taxes imposed by section 4975(a) and (b) of the Code, by reason of section 4975(c)(1)(B) and (D) of the Code, shall not apply to the lending of money or other extension of credit from a party in interest or disqualified person to an employee benefit plan, nor to the repayment of such loan or other extension of credit in accordance with its terms or written modifications thereof, if:
(a) No interest or other fee is charged to the plan, and no discount for payment in cash is relinquished by the plan, in connection with the loan or extension of credit;
(b) The proceeds of the loan or extension of credit are used only–
(1) for the payment of ordinary operating expenses of the plan, including the payment of benefits in accordance with the terms of the plan and periodic premiums under an insurance or annuity contract, or
(2) for a purpose incidental to the ordinary operation of the plan;
(c) The loan or extension of credit is unsecured;
(d) The loan or extension of credit is not directly or indirectly made by an employee benefit plan;
(e) The loan is not described in section 408(b)(3) of ERISA and the regulations promulgated thereunder (29 CFR 2550.408b-3) or section 4975(d)(3) of the Code and the regulations promulgated thereunder (26 CFR 54.4975-7(b)); and
(f)(1) Any loan described in section IV(b)(1) that is entered into on or after April 7, 2006 and that has a term of 60 days or longer must be made pursuant to a written loan agreement that contains all of the material terms of such loan.
(2) Any loan described in (b)(2) of this paragraph that is entered into for a term of 60 days or longer must be made pursuant to a written loan agreement that contains all of the material terms of such loan. “
I would be concerned about your lady’s proposed transaction on more than one front. First of all, would the IRA she proposes to make a loan to be considered an “employee benefit plan?” Secondly, could such a loan be considered to be “for a purpose incidental to the ordinary operation of the plan?” I think it’s highly likely that the answers to both of those questions would be no, and therefore the exemption would not apply. If you read the totality of the exemption it seems clear that this is not meant to apply to an IRA borrowing funds from the IRA owner for the purchase of real estate or whatever.
Today Quest IRA, Inc., a leading provider of self-directed IRAs, is announcing the merger & acquisition of Entrust Great Lakes, LLC, a previous franchisee of The Entrust Group. Quest will immediately begin offering is renowned free educational workshops, classes and networking events to the investment and real estate community in Michigan and the surrounding states. Quest will also provide and extend our superior customer service and amenities to the great clients of Entrust Great Lakes, LLC.
FROM June 21st, 2012: Today Quest IRA, Inc., the leading provider of self-directed IRAs, announced the opening of the brand new office in Austin, TX. Quest will immediately start offering their nationally renowned free educational classes and networking events for the investment, real estate and self directed IRA community in Austin.
Click the image below to read the complete Press Release on PRWeb
Your question was: “I had $104,000. that I rolled in to an account with IRA Services – it was invested in a “bad” company called “infostar” my account shows the money as a loss on statement. As well I purchased two out of state properties that appear on my IRA account- both were sold … but no one ever paid for them- can any of this be written off in taxes, even though it is a “traditional IRA ”
The answer: You can only deduct losses in a traditional IRA to the extent that you close all of your traditional IRAs and the total received as a distribution is less than the total undistributed after-tax contributions. For example, if you contributed $5,000 in non-deductible contributions and then built it up to $100,000, then you lost it all in a bad investment, all you could deduct when all of your traditional IRAs were closed would be the $5,000 after-tax basis in your account. Your deduction would be reported as a miscellaneous deduction subject to the 2% of adjusted gross income floor, which means that all of your miscellaneous deductions together must exceed 2% of your adjusted gross income before any of it becomes deductible on your Schedule A. This may limit further your ability to deduct your losses.
If all of the money in the IRA was pre-tax money (in other words, you deducted the contributions when you made them or were not taxed on the money contributed from an employer, assuming the money came from a former employer plan that was rolled into the traditional IRA), then you would be able to deduct none of your losses at all. The reason for this is that none of the money in the account was ever taxed in the first place, so therefore you cannot deduct the losses, since to do so would represent a double deduction, once when contributed and again when the money was lost. The following explanation is found on page 42 of IRS Publication 590, which you can download from www.irs.gov:
Recognizing Losses on Traditional Reporting and Withholding IRA Investments Requirements for Taxable Amounts
If you have a loss on your traditional IRA investment, you can recognize (include) the loss on your income tax return, but only when all the amounts in all your traditional IRA accounts have been distributed to you and the total distributions are less than your unrecovered basis, if any. Your basis is the total amount of the nondeductible contributions in your traditional IRAs. You claim the loss as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions on Schedule A (Form 1040). Any such losses are added back to taxable income for purposes of calculating the alternative minimum tax.
Example. Bill King has made nondeductible contributions to a traditional IRA totaling $2,000, giving him a basis at the end of 2010 of $2,000. By the end of 2011, his IRA earns $400 in interest income. In that year, Bill receives a
distribution of $600 ($500 basis + $100 interest), reducing the value of his IRA to $1,800 ($2,000 + $400 – $600) at year’s end. Bill figures the taxable part of the distribution and his remaining basis on Form 8606 (illustrated).
In 2012, Bill’s IRA has a loss of $500. At the end of that year, Bill’s IRA balance is $1,300 ($1,800 – $500). Bill’s remaining basis in his IRA is $1,500 ($2,000 – $500). Bill receives the $1,300 balance remaining in the IRA. He can claim a loss for 2012 of $200 (the $1,500 basis minus the $1,300 distribution of the IRA balance).
The rules for deducting losses in a Roth IRA are similar, except all money contributed to a Roth IRA is, by definition, after-tax money, so the deduction for a Roth IRA loss would be equal to the undistributed contributions to the account, subject to the 2% of adjusted gross income floor as discussed above.
If this seems a bit complicated, unfortunately it is. It is best to get the advice of a competent CPA to help you with this so that it is done right considering your personal tax situation. I am unable to give you tax or legal advice, but hopefully I was able to point you in the right direction.
I’m sorry for your loss and I wish you the best of luck in your future investments.
Host of the show: Selina Stoller
Your IRA Can Do Real Estate
Did you know that you can own investment property in your IRA? Quincy Long will be discussing how you can increase your retirement fund with your real estate investments.
Listen to this call on June 29th and NOON EST.
Who Should Listen and Why
Foudation for Debate from the Advisor asking Quincy: Gentleman, The debate continues:) I actually have an account with Entrust out of Equity Trust in Ft. Myers, FL. I use this company website as a resource: http://www.trustetc.com/new/self-directed-ira/self-directed-investment-options/rehabs-and-flips.html But, it does not seem to give much information regarding the the tax treatment of Flipping notes in an IRA: I am networking with a lot of younger investors and there seems to be a lot of questions and little information. When we ask our tax professionals they “look at us like-you can’t do that.” Most tax and legal professionals do not seem to understand much, if anything about Self Directed Investing. So here is a follow up to the conversation if you can help us clear this up. Just to put this into context, the original question was, “what would you do with $50k in a Self Directed IRA.” I would say the average reader is in their late 30’s.
IRA Investor 1: I find it very hard to believe that flipping notes could be considered appreciably different than transacting stocks quickly.
IRA Investor 2: I don’t think we are saying that they are “appreciably” different, just that the two investment options (stocks on public market vs. private market notes) are different in other means. I have no idea which is the correct and legal answer, but in my opinion, I see how one can argue that notes sold/transfered from flipping which deal with a buyer and a seller who negotiate between themselves and have contact between them in a private manner is functionally different than flipping stocks in a public market where the buyer and seller never negotiate and never have contact. To add to the confusion, what if you bought and immediately sold an actual business inside your 401k/IRA. Would UBIT apply?
IRA Investor 1: Flipping stocks doesn’t just magically occur either. A buyer and a seller still have to agree on a price for a transaction to occur. There may be fewer things to negotiate in these transactions, but I don’t see how they are really different from a “business standpoint.” What about trading something on the pink sheets? Is that somehow different still?
IRA Investor 2: I almost always agree with you, but will have to agree to disagree on this. Regardless of who is right, as no final evidence has been discovered clearly (and may never be clear), we just have two different thoughts on this. I see a difference in stocks vs. flipping notes as explained, you do not as explained. No problem. Not only that, when they discuss the fact that the IRA can use debt leverage on a rehab, it makes no mention of UDFI which also triggers UBIT (unless debt is paid off 365 days before sale). As I have mentioned in the past, unfortunately, find details are often missing from TPA’s such as ETC.
Advisor: It seems like there is a lot of mis information and confusion out there regarding the subject. I certainly appreciate your thoughts, time and any information you can cite to help us clear this up. Please note that am not asking for advice-just information on where we can find facts in regards to this subject.
Quincy: I think you’re trying to over analyze this and impose rationality and reason on the US government, which is of course quite impossible. Step back and ask yourself one question while forgetting entirely about the IRA aspect of it – would note flipping be considered a trade or business if you did it personally? If the answer is yes, then it is, by definition, a trade or business within the IRA as well, and it will generate UBIT, assuming it is “regularly carried on.” If the answer is no, then it should not generate UBIT. Whether something else like day trading stocks is or isn’t a trade or business is irrelevant. You are focusing on the IRA aspect of it when you should be focusing on whether or not it is a trade or business. In general terms, anything that you buy as “inventory” for resale to the public is going to be considered a trade or business, whether it is real estate, notes, widgets or anything else. Unfortunately, the standard of when you cross the line from being an investor to being in a trade or business is fuzzy at best and depends on many factors. Oh well, that’s the world we live in.
I have attached my short paper on UBIT. You may also find more information on UBIT in IRS Publication 598. The Internal Revenue Code sections dealing with UBIT are 26 USC 511-514. I hope that helps some. Good luck!
Advisor: Thank you for taking the time to help me out with this. It seems to me that it is best to err on the side of caution with this since the penalties can be so steep. I see a lot of guys buying and flipping homes in IRA’s. These guys are considered “Dealers” because they also buy and flip properties outside of IRA’s. I would say since these are bought with the intention of immediately offering them for sale to the public that they would then be subject to UBIT. The same would hold tru for a note that is immediately flipped.
When you say “regulatory carried on,” do you mean this is something you do inside the IRA X amount of times per year, X amount of times during the life if the IRA?
Quincy: Review Page 3 of IRS Publication 598, which states: “Business activities of an exempt organization ordinarily are considered regularly carried on if they show a frequency and continuity, and are pursued in a manner similar to comparable commercial activities of nonexempt organizations.” An example is given in the publication. I agree that intent is very important. I’m not sure that an occasional flip in an IRA among many other investments will cause UBIT, but certainly if that’s all that the IRA invests in and the IRA owner also flips properties outside of his or her IRA that would weigh heavily in the consideration of whether the IRA had dealer income. While IRAs are very rarely audited, it is always important to give the IRS what they are due, because they have what it takes to take what you have.
One thing I would caution you about is not to confuse the payment of UBIT with the penalties associated with prohibited transactions. It is perfectly legal to make investments which subject your IRA to taxation, but if you do a prohibited transaction it blows up your entire IRA and you and others may owe excise taxes and penalties as well. The two subjects are completely separate, but many people, even educated ones, get them mixed together in their minds.
Question: I recently opened a traditional IRA with your office.
Before I direct Quest to invest the money in “ABC Realty LLC”, I want to make sure I understand what I can and can not do as a realtor as it relates to providing services to the LLC (ABC Realty LLC) of which my IRA will be a member investor.
FYI – We have set up the LLC so that my brother, who is a non-IRA investor, is the ‘managing member’ of “ABC Realty LLC”. He is the only one who will have signature authority to sign contracts, issue checks, etc…
“ABC Realty LLC” is planning to flip single family homes. When the homes are purchased and certainly when they are ready to be sold, can I, as a licensed realtor, list the homes and represent “ABC Realty LLC” in negotiations as long as I do not receive any compensation or commission?
Thank you and kindest regards.
Answer: First, let me make it clear that, as indicated below, Quest cannot give you tax, legal or investment advice. While we strive to provide the best education possible for our clients, we cannot play the role of advisor, since these are self-directed IRAs.
You ask a very good question to which there is no clear answer. The conservative approach would be to avoid acting as the agent for property to be purchased or sold by ABC Realty LLC. The problem is that one of the prohibited transactions in Internal Revenue Code Section 4975(c) is that you cannot directly or indirectly provide “goods, services, or facilities” between a plan and a disqualified person. Where the line is between your duties as a fiduciary to your IRA and the prohibition against providing services is I cannot tell you. It is possible also that the IRS might consider your brokerage activity as an excess contribution under Internal Revenue Code Section 4973. That seems to be a favored technique of the IRS these days. The problem may be exacerbated by your naming of the LLC, since it contains your last name. I assume your brother’s last name is the same also?
As you correctly state below, under no circumstances can you receive compensation for anything you do relating to your IRA’s investment activity.
Remember, any and all expenses for your IRA’s investments must come from the IRA and any income must go to the IRA. Neither you nor any other disqualified person may benefit from the IRA’s investments, other than of course when you take a distribution from the IRA. All transactions must be on an arms-length basis.
Finally, you mentioned that the LLC will flip single family homes. Depending on your volume and the way you handle it, such activity may be considered Unrelated Business Income which may subject the IRA’s profits to taxation, even though the IRA is normally tax exempt. You may find out more information on this topic in IRS Publication 598. Also, I have attached some information on the subject for your review.
I’m sorry that I am unable to give you clear, definitive answers or any tax, legal or investment advice. I wish you the best of luck with your investments. Have a great day!
Self-directed IRAs and 401(k) plans have been around for more than 25 years. There are currently billions of dollars in self-directed retirement plans. Do you know how to unlock your retirement funds and those of your clients for real estate related investments, including loans secured by real estate? Your knowledge of self-directed retirement plans can help make you money now as well as ensuring that you retire in style.
7 types of plans which can be self-directed. There are seven different types of plans which can be self-directed, each of which may be invested in real estate secured loans and other non-traditional investments. They are the Roth IRA, the Traditional IRA, the SEP IRA, the SIMPLE IRA, the Individual 401(k) Plan, the Coverdell Education Savings Account (ESA), and the Health Savings Account (HSA).
Endless investment possibilities for self-directed IRAs. Self-directed IRAs and other plans may invest in a wide variety of non-traditional investments, including real estate secured loans, loans secured by collateral other than real estate, unsecured loans, real estate of all types, options, and private company ownership, including limited liability companies, limited partnerships, and non-publicly traded stock in corporations. If title can be held to an asset, it can likely be held in a self-directed IRA. This is because the IRS only tells you what you cannot invest in within an IRA (life insurance and collectibles), not what you can invest in. With few exceptions, the only limitation is your imagination!
Restrictions on what you can do with your IRA. Although as noted above there are very few investment restrictions, certain transactions (as opposed to investments) are considered to be prohibited. If your IRA enters into a prohibited transaction, there are severe consequences, so it is important to understand what constitutes a prohibited transaction. Essentially, the prohibited transaction rules were written to discourage certain persons, called disqualified persons, from dealing with the income and assets of the plan in a self-dealing manner. Disqualified persons to your IRA include, among others, yourself, your spouse, your parents and other lineal ascendants, your kids and other lineal descendants and their spouses, and any corporation, partnership trust or estate which is owned or controlled by any combination of these persons. Lending money from your IRA to any disqualified person is included within the definition of a prohibited transaction.
How you can use knowledge of self-directed IRAs to make more money today and to secure your future retirement. Although you cannot use your own IRA to make more money for yourself now (unless you are over age 59 1/2 and can take distributions), there is nothing prohibiting you from making money using OPI – Other People’s IRAs. As a professional in the lending industry there might be a number of ways you can do this. First, if you are a real estate investor yourself, you may borrow OPI to fund your real estate deals. This is an especially powerful tool for acquiring real estate which may need some fixing up. After the property is fixed up, you can refinance into a permanent loan or sell the property. Second, you can assist your loan customers in getting bridge loans from self-directed IRAs on properties for the purchase and repair, then set yourself up as a refinance lender. This is a direct way to put money in your pocket now from arranging the refinance loan and possibly even the IRA loan, depending on the law where you live. Many lending professionals use this technique to generate business for themselves. Dealing with savvy real estate investors can lead to multiple loans for them as well as for their buyers when the properties are resold.
Ignorance may be bliss to some people, but it will not make you wealthy. In this extremely competitive market, you owe it to yourself to learn about and utilize whatever techniques there are to generate a steady stream of quality clientele. The more you know, the better you look as a lending professional, which in turn generates more and better business for you. Between the advantages of using OPI to generate more business and income for yourself today and self-directing your own retirement accounts into something which you know and work with everyday for income in your retirement, there are very few tools out there today more powerful than the self-directed IRA.
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