Posts Tagged ‘IRA’

Self-Directed IRA Rules – Indirect Benefit

Friday, February 7th, 2014

Indirect Benefit

Investing in a Self-Directed IRA is a great alternative to investing in traditional investments such as stocks, bonds, and mutual funds. Through a Self-Directed IRA, you can invest in more non-traditional investments such as real estate, private placements, gold and silver, loans, and other hard assets.

Many individuals shy away from investing in Self-Directed IRAs because they don’t understand basic self-directed ira rules, don’t know what they can invest in, think the fees are too high or have been discouraged by their financial advisor.

Most clients understand with a Self-Directed IRA that they cannot invest with a related party. To learn more about related parties read more at, Disqualified Persons in Regards to Self-Directed IRAs and 401ks.  One self-directed IRA rule which is less understood and can be difficult to consult on is receiving or giving an indirect benefit from your IRA.

The IRS has made it clear that they do not want you to receive or give a direct or indirect benefit from or from your IRA.  A direct benefit that you could receive from your Self-Directed IRA could be living in the property that your IRA owns or receiving a salary from the management of your IRA assets.  Examples of providing a direct benefit to your IRA could be providing “sweat equity” to fix up a property when normally that work would be hired out.  Indirect benefits could be a number of different benefits.  Below, I will list some of the indirect benefits you could receive from your IRA that would be prohibited:

  1. You may not be living in a property that your IRA owns but if you use that property for personal use, even for a short period of time, it could be disqualified
  2. Leasing out space to another customer and then having that customer sub-lease part of the space back to you
  3. Buying raw land and using that land for your own personal use (i.e. hunting on land your IRA owns)
  4. If you want to invest in an investment that requires a certain initial amount (i.e. $100,000) and you don’t have enough personal funds to invest in that investment but with the combination of personal and IRA funds you do have enough money, it could be disqualified
  5. You cannot personally pay for expenses that your IRA should be paying for, this would be an indirect benefit you would be providing your IRA
  6. If you are buying real estate and are personally going to get a loan for a portion of the property, you cannot have the bank collateralize the IRA’s portion that it owns.  The bank can only collateralize your portion of the property
  7. You cannot loan funds to an unrelated party and then have that person turn around and loan the funds back to you

If you have any more questions about Self-Directed IRA Rules or if you think you could be entering into a prohibited transaction feel free to call, email or comment below. We are here to help you invest in the retirement you have always wanted. Set up an account today.

Author: , Self-Directed IRA Professional
1.801.683.9291
[email protected]

ROLL YOUR 401(k) OVER TO AN IRA

Monday, March 7th, 2011

Rollover a 401k to an IRA, this picture dipicts a small person rolling a big egg with 401k written on it.

You don’t have to leave your 401(k) or other employer retirement plan money in an existing plan if you no longer work for that employer. The same rule applies to an inherited 401(k) or employer retirement plan. Whether it’s your plan or it’s inherited, you can legally and advantageously move those funds into an IRA where either you or your financial adviser can invest and manage the money much more effectively with a self-directed IRA from AET. This is called a roll over IRA. There are no penalties or taxes to pay for correctly handled roll over accounts. To see some of the far more beneficial things you can do with an IRA which you can’t do with the employer plan. Click Here or call us directly for more information at 1-800-454-2649.

NEW! Self-Directed IRA Video!

Tuesday, June 1st, 2010

This is our latest educational/promotional video detailing the Self-Directed IRA.
Offering a simple diagram explanation of how the Self Directed IRA with Checkbook Control works and provides a simple example of an SDIRA Real Estate Transaction.

Self Directed IRA – Unrelated Debt Finance Income (UDFI)

Sunday, February 7th, 2010

A subset of UBIT is the Unrelated Debt-Financed Income (UDFI) tax. Under IRC § 514, the IRS will assess a tax on any income that is derived from the use of “acquisition indebtedness” in passive Self Directed IRA investments. For example, if your Self Directed IRA uses $30,000 of its own funds and also borrows $70,000 (using a non-recourse note, of course) to purchase a $100,000 rental property that generates $10,000 annual rent, the IRS would assess UDFI tax on about $7,000 of the profit (since 70% of the investment came from leverage). It is “about $7,000” because it is not simply a one-time fraction of loan-to-value. When calculating your UDFI tax percentage, you use the average indebtedness of the past 12 months and divide that by the adjusted basis in the property (typically, the original purchase price). So, as you pay down the mortgage each year, the UDFI tax percentage becomes less. One year after paying your final mortgage payment, the UDFI tax disappears altogether. When selling passive investments for a profit, the UDFI fraction will determine the taxable amount. Then, appropriate capital gains rates are applied to that amount (trust rates for short-term gains; capital gain rates for long-term gains. [See IRS Pub. 598.]

Remember that UDFI rules apply only to passive investments. If your IRA makes an investment, regardless of leverage, in an active (pass-through) business, including any active real estate business (flipping, rehabbing, developing raw land, etc), then the net income (above $1,000) is subject to UBIT.

Disclaimer

This brief discussion of prohibited transactions and UBIT/UDFI is not intended to be relied upon as legal or tax advice. It is very general information and is designed only to make you aware of some issues you might not have thought of and may need to discuss with your advisors. These rules can be very complex. Some of the rules have exceptions (and even exceptions to the exceptions!) and rules can and do change

Top 10 Self Directed IRA/401k Mistakes – #7 IRA owner uses personal assets or “Sweat Equity” for the benefit of the IRA

Sunday, November 22nd, 2009

A self directed IRA owner is clearly allowed to guide and manage the investments of the self directed IRA. The management can be relatively involved and substantial. As an example, the self directed IRA owner (or even the self directed IRA LLC manager – the account owner), could potentially expend considerable effort in finding the right real estate investment for the self directed IRA. This effort could likely be in the form of visiting many properties, speaking with many real estate advisors and experts, crunching numbers, etc.

However, a prohibited transaction or indirect benefit line could be crossed if the self directed IRA owner (or as the IRA LLC manager) were to use their personal tools and equipment to improve the property (e.g. use your saws, materials, truck, employees, to add a new roof). Another potential mistake is the self directed IRA owner provides all of the labor for making the improvements.

The general rule of thumb is that you are allowed to provide the necessary care and management of the self directed IRA’s assets, but you should draw the line at providing “sweat equity” or use and benefit of your personal assets.

To learn more about self directed IRAs go to:

www.nafep.com

www.iracentral.com