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Investing in Notes & Real Estate with a Self-Directed IRA

irei summit market research Jul 13, 2021

I'm Matt Sorenson and I'll be talking about self-directed retirement accounts and how they can be used to invest in real estate. I wrote the book "The Self-Directed IRA Handbook". It's what I am most known for. My book has sold 20,000 copies and it is the number one book in the industry. Every company in the industry uses my book and the National Association in the industry uses the book to train and certify people alongside a test.

I have my own company Directed IRA, of which I'm the CEO. We custody the client's self-directed accounts. I'm an attorney alongside my businesses partner, Mark Kohler.

Before we get started, I want to give you a disclaimer: Don't rely on anything I tell you. This is not an attorney-client relationship. Go seek out licensed professionals when conducting actual transactions.

We have an office here in Utah. I'm at our Phoenix office, Mark Kohler in Idaho, and then we have an office in Southern California.

A lot of real estate investors come to these types of presentations and wonder why there is a guy there talking about retirement accounts. There are 28 trillion reasons why. There are $28 trillion in retirement accounts in the US. I think a lot of people don't realize that this is the largest place of investable cash period. There's no other place that's got more money than us retirement accounts.

So if you're trying to fund the deal, you want to know these rules. If you're if you have your own little sliver of this money, do you want to know how you can use that money to invest in real estate or stuff that you may know more about, than buying a crappy mutual fund?

The very first time I got involved in this was in 2006, I had a client, he was this really sophisticated real estate developer in Texas. And he bought an option on a property with a Roth IRA, he used the Roth IRA, which happens when you sell something in a Roth IRA, the money goes back into the Roth IRA, and you pay no tax, and then it comes out when you retire totally tax-free. So it's like the only tax-free vehicle.

He bought an option on a piece of land. For $10,000, he had the right to buy the property for five years under the option. Now he knew there was going to be real estate development in the area, and that the state and the county had planned a freeway interchange going by this property. That's why he went and got the option on it with his Roth IRA. Three years later, the freeway interchange goes in the properties, no longer agricultural property, it turns into freeway commercial. So he goes and sells the option now because the price of the property went up over a million dollars. So he sold the option in his Roth IRA for over a million dollars.

I was helping him through this transaction. And I was always interested in retirement accounts, I'd kind of heard of it, we had some clients doing it back in 2006. And this is the one that opened my eyes. So I'm like, Wait for a second, this guy just sold an option. He only put 10 grand down with the Roth IRA, he got a million-dollar profit back in his Roth account, totally tax-free. And for this client, he was like, pissed. He was pissed at a CPA, his financial advisor, his other lawyers that he worked with, because he was very successful, and he knew how to make money.

But none of these people told him you could do this with a retirement account. And he's like, they're telling me to invest my retirement account in the stock market. I don't know crap about that. They know my tax returns, they know how wealthy I am. They know I do that all in real estate. Why didn't one of those idiots tell me I could have just used a retirement account and done this in a more tax-efficient way. And so when I when that client, when that came through this deal closed, I was like, that's it. I'm doing this from here on out, this is going to be my specialty.

That's what I focused on in my law practice. But I just want to give a few points on this first, though, is if you think of a retirement account, think of you know, just an IRA or 401k. Let's just hit a couple of basic characteristics of them. I'm really going to talk about how you invest this in real estate or notes and stuff like that. But I just want to make sure we understand the benefit of a retirement account. If I have Facebook stock that I bought for $100,000. It goes up to 150. I sell it for 150 in my IRA, that 150,000 goes back into my IRA, and I pay no tax on the gain, right? It's in an IRA and if it's a traditional IRA, it's just growing tax-deferred. When I reach retirement, I pay taxes I pull money out. If it's a Roth account, it grows tax-free and I pull out the money tax-free at retirement. So both of them are tax favorable. Okay.

The benefit is when I sell it an asset I don't pay tax on the gain right in a retirement account. Well, it works the same way in real estate. If I bought a property with my IRA for 100 $100,000. I sell it for 150. That 150 goes back into my retirement account. I pay no tax on the gain. Okay. So it's the same concept. So because of self-directed retirement account can be used to buy real estate and notes. We're trying to make sure everybody who does real estate knows about this because we want you to invest in what you know and what you're good at. So I get these presentations everywhere. And Mitt Romney's in my slides. He's, he's the senator nowhere, right. So when he ran for president, though, this was a pretty big topic. He had an IRA worth of reported 25 to $100 million, he had to report on his presidential disclosures. And so the media is like, how can someone have such a large retirement account, you can only put in $6,000 a year into an IRA.

Back then when he was doing he could put in way less? Well, he wasn't investing in mutual funds in the stock market, he was investing in small companies that they were helping or consulting with, like staples when it was one store. And he was investing in what he knew. And they were getting excellent returns on the investment. That's why he has such a huge IRA. So also, Peter teal, if you're familiar with Peter teal, he has the largest retirement account, period. He was if you somebody seen the movie, The Social Network, okay, the social networks about how Facebook started, there's this scene in the social network where they get their first investment of outside money. And it's this kind of controversial scene, they've kind of got this new office, and they're becoming a big company now.

This investor comes in and invests money in the company as the first outside money they take, and that guy was named Peter teal. He was the founder of PayPal is a very famous tech investor. Well, he invested with his Roth IRA, Facebook, first outside money, and Facebook was a Roth IRA that's now worth over a billion dollars, that guy's account. So and that's tax-free, by the way in a Roth IRA. So there's a lot of people that use retirement accounts to invest in what they know.

Now, you may be into tech, you may be into private equity. You may be into real estate. My point is, why are you just buying a mutual fund with your retirement account? Why do you I mean, a lot of people, I just want to be in the market, and I get that, but if you can make good investments, you might as well use your retirement account to do it. Okay. I want to just illustrate a couple of points. And I'm going to take a break here for questions. But the first thing to understand is, let's say that what's your name? Coco. Oh, that's right. Okay, Coco. Okay. Sorry, we've met.

Let's say that Coco wanted to buy real estate with her IRA. She's like, I got an IRA at TD Ameritrade. Now, if you go to TD Ameritrade, and you say, you call them up and you say, hey, there's this four Plex I want to invest in, there's this person I want to loan money to on a real estate deal. I don't want to do that with my IRA, TD Ameritrade, or fidelity, or whoever your accounts with say, you can't do that. What they mean by that is, your account at TD Ameritrade cannot do that. retirement accounts can own real estate, they can own a single-family rental, they can own a property that flips, they can own a note on a property it can invest in an LLC. It's just an account at TD Ameritrade that can only buy stocks, bonds, and mutual funds. So when retirement accounts were first started, what happened was the financial services industry realized people were really putting money into these things, because they were first going to like banks and credit unions.

Well, the financial services industry is like, Oh, my gosh, people are dumping a lot of money into these, we're gonna open up accounts, and we're gonna let them buy the crap that we sell, or, you know, whatever, you know, we're gonna let them buy what we sell. So like all the financial institutions, the broker-dealers, they started setting up retirement accounts. Voila, that's where everyone's money is at now. And so, people think you can't do that. Just because everybody's account generally is a place that doesn't let you do it. So the first thing you'll have to do is you just need to change the custodian. Don't be at a broker-dealer that makes you buy the broker-dealer product, you can move your account to a self-directed IRA custodian, there are like 30 of them out there.

That's like my company-directed IRAs, one of them and then you roll your money over there, you set up an account there, and then you can buy real estate, you're not restricted to stocks, bonds, and mutual funds. So the problem is, it's like when you go call fidelity or Merrill Lynch and you say, hey, I want to buy real estate with my account. You know, and they say, no, it's kind of like you went into Arby's and you asked for a chalupa, you know, it's not that you can't have a chalupa you're just at the wrong place to get that. Okay. So you need to get you you need to get out of Arby's and go to Taco Bell. Because they have chalupas.

Okay, that's like real estate and your retirement account. So you'll have to move custodian. So you move your account to a self-directed custodian who lets you do that. So now if you say, Alright, I want to buy a piece of rental property, let's say you want to be a fire rental property with your IRA, you move it from where it's at now. Now you have a self-directed IRA, or self-directed retirement plan. Now, the retirement account buys the property. Now, this property has to be held for investment.

This is not a property you're going to stay at, this isn't a second home, your kids aren't going to stay at it. Okay, this is an investment it needs to prevent produce investment income, like rental income, or a capital gain if you sell it for a profit. Now the retirement accounts on the title to the property. So like, if your accounts with us, like let's say, this is Matt Sorenson doing this, it's not Matt Sorenson buying the property. It's Matt Sorensen's IRA buying the property.

So on top of the contract of purchase, it'll be directed Trust Company, FBO, Matt Sorenson IRA, and then the IRA custodian, like in my case, our own company, where we would approve the sale, and we would process the money to title or escrow to buy the property. When there's rental income, it goes back to the IRA, when there are expenses, the IRA pays the expenses. everything's happening at the IRA, this isn't you, you don't own it, your retirement account does. And that's it'll stay off your personal tax return. It's not taxable. K, this is building up in your retirement account. Alright, now you can buy multiple properties, you can do notes and stuff, which we're going to talk about. But any questions so far on a self-directed retirement account?

Does your self-directed retirement account have to buy the property 100%? Or can you do a down payment with yourself? It's a good question. The short answer is yes, you can get along but you got to do it in a special way. So and one thing I'm going to say about this, too, is, um, I think some people are like they hear sometimes I get these rules. And that, you know, my books got 19 chapters in it, I'm kind of a nerd. So I geeked out on it, I put all the tax code citations in it to make people feel like, Oh, this guy just didn't just like, shoot this off the cuff. But it's not hard.

As I tell you, it's just like playing a new board game. If you just sit down and start playing, and nobody told you how to do it, or you didn't read the manual, you're going to screw it up, you're going to do it wrong. The problem if you do it in your retirement account, it causes taxes and penalty issues. So you just got to make sure when you before you play the game, you know the rules you play with someone you know, or you read the book, so to speak, so, so don't get too overwhelmed with these rules.

Alright, so simple enough retirement account owns the property retirement account gets the income on the property retirement account pays the expenses. Now we're going to show options where you can use an LLC in the middle too, as well. You can also do a note, we have a lot of clients who retirement accounts in my retirement account. My own retirement account owns rental real estate that I actually bought from Steve Olson through fig. And also you can do private money lending, which I also do. So if you're doing private money lending, what happens is the IRAs the lender, on the note, the IRA is getting back points in interest. Okay, easy enough. You're just playing, you know, hard money lender with your IRA. That's a very common, very popular, self-directed investment.

Okay, you can always roll over money. So like I said, if you have an account at Charles Schwab or TD Ameritrade and you want to move the money over, there's a lot of different ways you can do it, you can do what's called trust. Like if I have a Roth IRA at Merrill Lynch, I can move that to a self-directed IRA. If I have a traditional IRA at my credit union, I can move that to a self-directed IRA. If I have an old employer's 401k plan. It's called the direct rollover, I can roll that over to an IRA.

If I have a 401k. With an employer, I still work at 959 and a half or older, I can roll that over to an IRA. Now one place where people get stuck, though, is if they have a self-directed retirement account, they're under 59 and a half, and they still work. Sorry, they have a 401k. They still work at the place. And they're not 59 and a half yet. So let's say you're 40 you have a 401k at work, you're stuck until you quit, you're stuck in the company's plan, they're not going to let you move it out somewhere. And I've seriously had people quit their job to move their money and their retirement account. Some of them go back to work next week, but I don't recommend that but you know, some people are like, determined to do this. So, but if you're over 59 and a half, even if you still work at the company, You're generally able to roll out the money.

Yes, you combine a traditional IRA, a SEP IRA? Yes. Yes, you could, if you have a Sep and a traditional IRA, you can move those into one self-directed IRA that you can use to go do this. And you probably just do a traditional IRA, because the SEC can roll into a traditional, yes, a private lender, if you have to take that asset. Yes. Okay, question. If, as a private lender, if you have to take back the asset, how does that work?

So hopefully you got a mortgage or a deed of trust. And so if you have to foreclose the IRA forecloses the IRA takes the property back. Excuse me, now, the IRA is on title, the IRA owns it, or it could have sold it at auction. Third-party if you hang on to the third-party management, right, you can reverse? Yes. So another important rule is, and I'm going to get to this is called primitive transactions. If your IRA owns real estate, like let's say you have a rental property, you're restricted from physically working on it, you can go and look at it or tell a contractor what to do to fix it. But you actually can't physically make improvements to real estate, your IRA owns yourself.

Because it's deemed to be serviced, that could be a contribution to the retirement account, it gets into complicated retirement account tax problems. But the IRA obviously pays some third party to do it, the handyman, whatever to go fix things, or a property management company that handles that stuff. That's all fine. Now, I think some people are really surprised because there are very limited restrictions on what a retirement account can buy. These are the only three asset types you cannot buy, with a retirement account. It collectible items, life insurance, an S corporation stock, are the only things that retirement account cannot buy.

Now, we have a lot of real estate clients that you know, maybe and shouldn't S corporations. But you can do LLC all day long. And we do a lot of LLC with IRAs. Life Insurance, probably won't look into that with IRA collectibles. This was one that was when retirement accounts first came out, you could invest in collectibles, people would buy like art with their IRA or retirement account. They were buying antique cars that would like you to know, kind of disappear on the weekends and come back.

They were buying wine collections that turned into bottle collections. And so so like the IRS had to come down and you know, like, say, No, you're not doing this anymore. You just can't buy collectibles, there's too much potential for abuse. But that's it. So what happens is the big rule you have to know about when you self directed retirement account, and you want to buy real estate, you want to partner with other people, you want to maybe use some personal money in some IRA money or use your account in your spouse's account. And we're going to go through that.

But the biggest rule you need to know is called the prohibited transaction rules. But that is a rule that has to do with whom your account is transacting with, not what you're buying. So the prohibited transaction rules are concerned about if my IRA is buying something who's buying it from, or if it's selling an asset, who's selling it to, or if it owns an asset, like a rental property, who is it leasing it to wherever loan someone money, who's the borrower, like, they want to know who's on the other end of the deal. And what the reason they want to do that, and this is when Congress created retirement accounts, they're like, these are tax favorable accounts.

We don't trust people with them, we know they're going to screw us out of tax revenue. And if there was a way I would tell you how to do it, but there's this rule that says you can't. So basically, what it boils down to is your IRA cannot transact with certain people on this disqualified list. That includes yourself. So let's say I own real estate myself, personally, my IRA can't go buy that real estate from myself. That includes my spouse, my parents, and my kids. And there's a longer list here. But essentially, that's the first type of primitive transaction. It's called per se, a per se, primitive transaction. And it occurs when your IRA transacts with someone who's called a disqualified person, and remember, the owner of the IRA is disqualified their spouses, their kids, or their parents are.

Now if you're just buying real estate, out on the market, the family's not involved. You don't need to stress about this. But sometimes we have clients that are dealmakers and they've got stuff going on and they're trying to push this rule or they've got family members or other accounts involved in the deal, and they want to all invest in it. And that can work but you got to be careful. Now, let me We'll come back to this, but here's who's disqualified. Yeah.

Here's who's on the disqualified list. You as the owner of the account, your spouse, your kids, your spouse's Your grandparents, your parents, grandparents, any companies these family members own 50% or more of is also disqualified. So what's your name? Casey? Okay, let's say that Coco Casey and Matt each on 1/3 of an LLC, that LLC owns a property that we went and rehabbed. And we were flipping it, now we're going to sell it. And let's say that we're okay. We're not related, right? And let's say that I decide, you know, I want my IRA to buy that. I want to buy that as a rental from the LLC.

Could my IRA transact with the LLC and buy the property? What do you think I own the third case? He owns a third. Poke owns a third. Yeah. Okay. Yeah, cuz I'm not over 50. Okay. But let's say that Coco and I were spouses. Now, we're over 50 cases, or sorry, yeah, we're two-thirds cases 1/3. Now, can my IRA buy from the LLC? Now because we've gone over the 50% rule. So it basically is saying if these people that are disqualified control the company, and control for the IRS is 50%, that LLC is disqualified too.

Yeah, so I have two questions that are like one is the buyout and let's say, You're not necessarily you're strapped but yeah, Coco. Okay, after you do the deal, what happens to the ER now you do the deal. your IRA owns everything you buy out Coco cuz Coco wants to sell for whatever reason.

So I'm confused about the facts. The first we have 1/3 1/3 1/3 and it's me personally do the deal. The deals are done, you own the IRA? the IRA bought it IRA bought the IRA bought, okay, the IRA owns the property now. They paid their own cash, right? Or, Oh, okay. You're saying let's start over your separate three separate individuals, your IRA, put your money in, okay.

And then they bought it however they want. Okay. They use their IRA personally. Okay, cool. So then I'm good with that. Right now. Do you guys go to an apartment complex? Yes. And then Coco says, I'm out. Yes. I can buy her out. You can buy or hire a buyer? Oh, yes. Are you a spouse? In this scenario? 50%. That's cool. The 50% rule. The 50% rule is misinterpreted and is enforced in many companies in the industry because they don't understand it. The 50% rule has nothing to do with that situation. So here's the other part. So I am part of a family. That's like I was a good question, by the way, because a lot of people, a lot of companies, you'll call will, like, hit the buzzer on that back at can't do it. But it's because some of them are morons.

A family company and I don't know 50% of our we have a management company. Yeah. So we kind of do everything from development to property mentions. Okay. Could I have my IRA invest in one of our deals that I also manage? Right, you know, I take, we hire a general contractor, we hire out everything except for the property management.

Is that how much ownership do you have in the family property management company? Well, under 50%, okay, well, I'd have to add up in that family, how many people are on this list to your IRA? Like your parents, your spouse? It'd be, if this list of people to your IRA when over 50%, you're you wouldn't have a prayer if it's under 50%. It's possible, kind of more of a console question.

But it's called self-dealing is what it could fall under. Because let's say you get around this rule as we had here. The other issue you have is what's called self-dealing. If you're making money on deals that your IRA is doing, personally, the IRS could call it a self-dealing private transaction. Let's say that my IRA buys a property that I Airbnb, and there's one week nobody stay in there. And so I'm like, I'll just go on vacation, I'll just go stay there myself with my family. My IRA owns it. Uh, no, I was gonna, nobody gonna stay there. I was not losing money. So I go stay there. Well, you just benefited from your retirement accounts, investments, which causes a self-dealing prohibited transaction.

Also, let's say you have a real estate license, your IRA buys property, and you want to get the 3% buyer's agent commission for your IRA buying the property, you just benefited from your retirement accounts investment. If you accept the commission, then that would cause a primitive transaction. Now you could reduce the purchase price to essentially get a credit for the commission. With that, the IRA gets a discount on the purchase, but you can't personally make the money.

Yes. So if we use that same scenario with your Airbnb, yes, stay there that we could you pay to go there or you couldn't even stay there at all because that money would then go towards your anyway. Right?

Exactly. See, exactly. That's exactly the problem. Either way, you're screwed because if you stay there and don't pay for it, it's self-dealing, right? Because you're unfairly benefiting if you stay there and do pay for it, well, you're a disqualified person paying your IRA. So it's prohibited that way. If you say they don't tell you about it if you stay there and don't tell anyone about it, it's attorney-client, attorney-client privilege, you know, I'm not going to tell anyone so. But, you know, I mean that it's like anything, it's, you know, it's your obligation to report your taxes and all that stuff in a fairway. So it's not like there's primitive transaction police out there, except that you're just subject to audit. Okay, let me just make a couple of points on the family.

There's if you notice on this list, there's a lot of families not on here, brothers and sisters, you know, your retirement account could loan money to your brother or sister, okay, I have a lot of clients that are real estate investors that partner with their siblings, they may have a brother or sister or someone that they partner with, and or do deals with. And that's fine. You guys can transact between each other all you want, brothers and sisters are not on the disqualified list. aunts and uncles, also now when you go down the family line. So when you go down the family line, you pick up in-laws.

My oldest daughter is 20. even believe it she goes to the University of Arizona, she's got a boyfriend, his name's Eric. Actually like Eric, He's a good kid. But let's say to get married one day, okay. And Eric comes to me, and he's like, Dad, you know, or whatever that how that works. You know, he's like, I got this real estate deal. You know, I just need like, 50 grand to cover the rehab, do you want to loan me 50 grand from your IRA, I'll give you some interest and stuff. I'm gonna say, Eric, you're a disqualified person. You married my daughter, you are a spouse of a child of mine. you're disqualified in my area, I cannot lend you money. So I'm actually off the hook that right?

But let's take a different scenario. Let's say my mother-in-law comes to me and says, Matt, I need a place to live. I want to sell our house. We're going in retirement, can you just buy me a house and I'll rent it from you. Now I could tell my mother-in-law, yes. Because in the rules, ancestors are what is considered prohibited, which includes your parents and your grandparents, sorry, parents, and grandparents. But the rule says ancestors, it doesn't say your spouse's ancestor. So you don't have to pick up your mother-in-law and father Ma. So my IRA could transact with my mother-in-law. Okay. It never will. But theoretically, it could. Okay. So just think when you go down the family line, you pick up in-laws, when you go up to your family line, you don't even have to include in-laws and think of it as your own IRA, your mother in law, father in law, your IRA could transact with if you're crazy. Down the family line. Even if you want to transact with your son-in-law, daughter-in-law, it's prohibited. This is a fancy little diagram that says that.

Okay, the government accountability office who basically, you know, as a watchdog group and police's, the IRS for many issues, did a report on self-directed IRAs that came out in 2017. I consulted with them on the report, actually, they use my book as well, they came out with this diagram to kind of illustrate some points that you cannot do with a self-directed account. So when you have an IRA, you can't rent it to certain relatives. Remember, this could be your kids, parents, your mother in law school, actually, you can't personally pay for repairs. This is another issue. Sometimes we see. Some, somebody IRA has a rental property at owns or a piece of real estate. And they personally pay the property tax payment, that's a problem. You don't own what your IRA does your IRA needs to pay the expenses on it. So you have to keep your retirement accounts separate from you. That's the most important principle. Yes.

Let's say you're investing in a fund you need to put in capital, you hope you have enough money in your IRA? Or if you're not, you're gonna have to tell them sorry, I can't do it. I mean, maybe you could roll over money or make a new contribution. But if you've depleted all those options, you're if you're so well,

Flipping properties does not work. If yours is correct, you can be there and be like a general contractor, just don't pick up a hammer. Like you can be there to make sure all the subs are doing their stuff. And you hire them and manage them and oversee them. And you're you can do the paperwork and everything. We just don't want you physically putting in services or labor.

Since you guys brought up flips, this is a perfect transition to the second thing you need to know. As for me, I consult with clients all day long on deals Can I do this? Can I do that? How do I structure this? What do we do? And so that's like my job. You know, that's what I'm doing. I'm helping all of our clients do the transactions they hope to do with their retirement account and 99% of the questions boiled down to prohibited transactions, which we just talked about, and ubit tax, which we're going to talk about now. So there's a tax called a ubit tax, unrelated business income tax. And this is a tax that applies to retirement accounts when they receive business income.

Retirement accounts are designed to receive investment income, if you get investment income in a retirement account, you don't have to worry about ubit. And investment income as like rental income, capital gain, income, interest, income, dividend income, that's this type of stuff you want to get in a retirement account. If you get that. Don't worry about this anymore. But if you're getting business income, like flips, or real estate development, you can run into this tax. Now, this tax came about, like back in the 50s, or 60s. And what was happening at the time is a lot of nonprofits in New York City, as New York University. And there are some museums were opening restaurants in New York City. And they're opening because all of their people that attended their stuff, they wanted to have a restaurant for him.

Well, the restaurant industry in New York City got all pissed off. And they're like, this isn't cool. These are nonprofits, starting restaurants that don't have to pay taxes, and I'm right across the street, paying taxes. And I have to compete with them. And so they went to their representatives in Congress and represented the Congress did You're right, that is not fair. We are going to create a tax and tax them. So they create a tax called ubit. Tax.

It was first applied to nonprofits. And they basically applied it to a nonprofit when the nonprofit did something that had nothing to do with being a nonprofit. So NYU is an A university, if NYU wants to have a restaurant, fine. But that's not a nonprofit, the nonprofit has to pay tax on that. You want to be a museum and have a gift shop, great. The museum doesn't have to pay taxes on you know, your fees, and whatever. But whatever you make in the gift shop, you're paying taxes on, okay, and that tax is called ubit. Tax.

So when retirement accounts came out, they said, let's apply the same tax on retirement accounts. If you get investment income, don't worry about this tax. But if you get business income and you're competing with business, you have to pay you bet tax. So for real estate, really the key one is flipping, construction, and real estate development. Now for flips. If you flip a few properties a year, don't stress about this tax, we're talking about in a significant number of transactions, where the IRS would look at your IRA and say, Oh, your IRA is like a real estate developer or a builder, it's doing so much real estate transactions. It's in the business of real estate.

So if you're doing 123 flips a year, I wouldn't stress about this ubit tax. If you're doing more than that, though, you're flipping a lot of properties in your retirement accounts. And I have some clients here, I know that does this. And they have to stop when they get to three. Because if you start doing four and five, now all of those gets subject to you but tax that you did through that year. So if you hit three for the year, you've done in your IRA, do the fourth one with personal funds or in your S corp or whatever you may do flips outside of that. Yeah. The ubit tax rate, was just reduced by tax reform.

Thank you, Donald Trump, to 34%. That's still a crappy rate. He used to be 39. So yeah, so you want to avoid it. Now. If you're doing deals, I have clients that have done real estate developments and are doing them now still, with retirement accounts, primarily with Roth IRAs, they know they will have ubit. So they do what's called a blocker Corp, where we have the retirement account on a C Corp, and the C Corp does the real estate deal and we pay C Corp taxes which are 21%. The short story is avoid this tax if you can, if you're gonna get hit with it, there is some tax planning stuff to chop it down.

Alright, for notes. If you're doing a lot of hard money lending like you're doing private loans, and notes, no matter how many notes you do, you don't need to worry about you but the IRS had a revenue ruling on this 79 349 that basically said no matter how many loans you do with a retirement account, even if you may look like you're a bank you're still exempt from you that you get the interest income exemption. So it's more like short-term flips. Also, you can have as many rentals as you want, you're still fine. The short-term flips are the volume one that causes the ubit tax issue.

It's always like a bummer. Like Ah, dang. Yeah. I don't have that much time, but I appreciate the question if you want about there's a tax there's what is called solo 401k is it's a chapter in my book. That's another self-directed retirement account that can avoid a tax. We'll talk about a set called UDF II but Randy Asti Sorry, I will not get to that question. Okay, IRA LLC is all stayed after, by the way, I'll be out in the hall. If anybody's like, what's he talking about? I'll be back there. Okay, there's a strategy called an IRA LLC. Some people call it a checkbook control IRA, that is used to buy multiple assets or maybe use this I have a bunch of notes here.

This could be multiple rental properties that could be a rental and no, they could just be one asset. But a lot of people rather than having their IRA own a note or their IRA own property, they'll have their IRA own an LLC 100% and the LLC then owns the assets like the rental or the note. So for example, this is Matt Sorenson IRA, this is Mat's real estate LLC, and this is a rental property, this is a note and the LLC just owns those directly, the rent the tenant on the rental pays me to rent to my LLC, the borrower on the note just pays the payments to my LLC, and I can build it up in the LLC. Now if this is m&s real estate, LLC, I don't own the LLC, my IRA owns at 100%. But I can be the manager of the LLC, the manager of the LLC is like the president of the corporation. So I can sign for everything with the LLC, I want to go cut a deal tomorrow, I want to buy a property at auction in a couple of hours, knock yourself out as manager of the LLC, you have authority on the bank account. You can sign contracts, you can receive income, you can pay bills, you can send out wires, so you're really in a lot of control with an LLC.

In a lot of states like Utah, for example, they're very cheap, like the and the annual fee is like 20 bucks, your state filing fee is about 70. Our fee to set it up in our law firm is 800 bucks. But in some states like California, it's like $800 a year just to have an LLC. So what happens here is again, you have a self-directed IRA it owns an LLC 100%. So now the only asset the IRA owns is m&s real estate, LLC. m&s Real Estate LLC could own 20 different assets. So it's a way for you to have greater control, manage expenses, conduct transactions faster, you can sign and do everything. And you're just signing for the LLC as the manager. Any questions on LLC, you're basically got one funding? Yes.

From your perspective, my IRA? Yep, yep. Yep. Until see, if I ever want to pull cash out? Yes. Great, yes. Now, let's say you've got a bunch of cash sitting in here and the LLC bank account because it's just gonna have an LLC business checking account, you want to take cash out, now you've reached 59 and a half, which is how old you have to be to start pulling money out. without penalty, we'll use, you'll send a check back to us to your IRA, we deposit in your IRA account. And then you request a distribution, we send you a check or wire from your IRA.

So that has to go. You can't just cut yourself a check from the LLC. Because remember, you don't own the LLC, your IRA does. So it's gonna go back to your IRA, and we're gonna get it and we're going to record keep it on your account, because we report it to the IRS, because there are two things you got to send the IRS when you do that. And so we in whoever your IRA custodian does, they're going to track that and record keep it for you. Yes. I can only max out your IRA. Yes, yes, exactly. So let's say you've funded this in 2019. And you're like, Alright, I'm going to make contributions later in the year or next year, and I want to invest those additional dollars. Yep, you'll just contribute here.

Then instruct your custodian like us, for example, to say, invest these additional dollars to the LLC. Yes. Yourself as a manager of the salary? No. There's a case called Ellis versus Commissioner who was an IRA LLC structure guy who was paying himself a salary, the IRS said it was prohibited because he was benefiting by paying himself. So we've always said you couldn't do that to the restriction in our documents. And so an IRA LLC document is a little different than a regular LLC. You know, in an IRA LLC, there's going to be restrictions on what the IRA can and can't do because it's built a little different than a regular LLC. But yeah, you can't pay yourself. You pay your brother or your mother-in-law. Yes. controversial. Yes.

The question was, is checkbook control controversial only amongst people Who likes to raise controversy? The IRS doesn't care. I mean, there's a lot of people in the industry that like will be there's, there's probably like 30, self-directed IRA custodians out there. And I'd say like, of the 3020 to 23 of them allow you to do an IRA LLC, where you're the manager, and then maybe seven or so don't. So. So there are many reasons why some of them don't. But you can.

If you're helping a client set that up, do you set up both the LLC and the IRA or does the client go set up the LLC on their own and make sure it's titled right here?

You would need a lawyer to set it up, generally. They're two different things. So there, one is the IRA, you have to have the IRA account, and that would be directed IRA. That's our company that does that. Then secondly, the LLC, you need to have some lawyer do it, or you need to make sure the documents are really right for an IRA LLC. And we do that in our law firm for 800 bucks. So we're kind of a one-stop shop.

Yeah. But there, they're two separate services. Okay. And you tell me when you're visiting. Okay. Okay. You get the last question. You get the last question. Yeah. Yes. So we're, we're a Trust Company regulated by the Arizona Department of banking. So Central Bank is here in Utah, the only other one that there's there used to be American Pension Services, which went into receivership. Which is not good, so you want to work with someone who's regulated.

Whether it's a bank or a Trust Company, we're audited and examined by the banking department, just like the bank is we have outside audits by independent CPAs. So there are some people in the industry called third-party administrators. If you're looking for a custodian, you're like, I don't want to use directed IRA, to whoever you're using. Just make sure they're regulated. So if they're a Trust Company or a bank, they're regulated.

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