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Permalink Like Dislike I am just reading about these.
http://usatoday30.usatoday.com/money/perfi/columnist/waggon/story/2012-07-12/self-directed-iras/56181024/1
http://www.fool.com/investing/ira/2009/01/08/why-you-need-a-self-directed-ira.aspx
any one use these types of accounts? specifically to make real-estate investments?
thanks very much!
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Ptiemann does. He knows it pretty well. For me, I don't bother with it. It makes sense if you intend to buy 12%-18% notes. You can do hard money lending with it too, but I believe you must have your RE broker license due to usury law. It doesn't make as make sense buying RE because you lose out some tax benefits like depreciation, and you mst pay a fee everytime you write a check and/or there is an annual fee of several hundred dollars.
Basically, SDIRA wasn't cut out for me.
Good luck.
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Sure. Check out http://broadfinancial.com/self-directed-ira/real-estate-ira
You must also beware of prohibited transactions aka investments prohibited by the IRS.
http://broadfinancial.com/prohibited-transactions
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If you think you can do a better job at managing it yourself than you should.
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E-man says
Hi Eman, I have a question for you.
Isn't that tax benefit guaranteed on all rentals, or is it something that is no longer available if done through SDIRA?
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I use SDIRA, it's legit and can have advantages. My wife has a couple rental properties through hers and I hold a couple private mortgages. You don't need a RE license to hold paper. It just has to be a legitimate financial instrument. If you use a property manager you don't have to have the IRA account cut checks, the property manager can do it before sending on the remainder of rent to the IRA. Taking out a mortgage is very very difficult to almost impossible so you need enough in the account to buy a property flat out. Since the IRA is tax free until you withdraw you don't file any tax forms with the IRS on proceeds from it. So there is no depreciation allowance because there are no taxes. Figuring out whether this will be beneficial for yourself is tricky. I'm netting 10% on the paper I hold, my wife is netting about 11% on the rentals. That's tax free until you start withdrawing then it's regular income.
The rules (prohibited transactions) are very simple, everything must be hands off and third party. A property manager is really essential to comply with this and you can't have any interaction at all financially with the properties.
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Bob,
Thanks for chiming in. What you explained above makes more sense. Everything is deferred until you withdraw from it later. I've always thought depreciation is mandatory regardless of whether or not you take it.
Assume inflation is 3%. So you're getting about 13%-14% cash on cash return. That's damn good. There's no reason to mess around with the stock market then. That's the beauty about real estate though. It's a hard asset that produces income unlike precious metals.
Fortwayne,
In 2011, I netted $29k of income on my duplexes. The depreciation took away $18k so my taxable income on the rentals was only $11k. If you invest correctly, you will always have positive rental income instead of losses. There's no real estate losses for you to write off.
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E-man says
You're still thinking filing 1040/ir3r/etc./etc.. Paradigm shift, tax filings don't exist. The IRS treats rental income (or in my case payments on the note) going into a SDIRA just like the money from bonds or dividends going into the IRA. It just comes into the account and it's there. Get enough money back in the account you can buy another house. Sell houses later and all the proceeds simply go back into the IRA. There really truly is no tax accounting involved. It's like black magic. When you withdraw later it's all just ordinary income. One caveat, the house(s) is/are titled in the name of the IRA. The IRA owns it for you.
You can invest in almost anything financial except collectables, life insurance or chapter s corps. You can invest directly in a business, say developing land (as opposed to owning stock), but you trigger a tax burden ( unrelated business income taxes) and an accounting nightmare. Same problem with a mortgage but its called unrelated debt financed income. You have to pay prorated taxes on the financed part of income. Both cases defeat the whole beauty of SDIRA, income with no tax filings.
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Bob,
Thanks for the info. I haven't spend much time reading up on SDIRA because my current investment model is working fantastic. Ptiemann knows quite a bit about it, and I haven't spend much time picking his brain.
So no more stocks for you? :)
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That is a very clever nice way of doing an SDIRA, thanks for the info guys.
Going to have a chat with my accountant over this.
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E-man says
The stock market scares the shit out of me right now. It just doesn't make any sense at all. I just keep have a nagging feeling it's truly an insiders game any more and the suckers are going to get played.
Plus the leading edge of the baby boomers are starting to draw down their retirements, both IRA's and defined benefits. I don't see any way in hell demographically that in 10 years the outgoes from retirement accounts won't far exceed the amounts being put in. That means 2/3's the shareholders will be selling out of the market on a regular basis to get cash to live day to day. Yes I know that in theory everyone withdrawing should be in bonds by that point, but it ain't going to happen. Even so if all the boomers shifted from stocks to bonds over the next 20 years it would still be a disaster for stocks. I really honestly don't understand what holds this house of cards up. Maybe it really is different this time.
My real estate holdings are in the Rio Grande Valley, a very popular area for retirees. I don't think (I could be wrong) I can get hurt when 70 million people retire over the next 20 years.
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FortWayne says
Caveat #2, don't get caught flipping houses out of your SDIRA, you'll get killed with taxes. You need a real legit investment reason to sell like starting your withdrawals.
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Bob,
I know people that claimed they flipped properties with their SDIRA. They did mention that they only do that once a year. Based on what you said above, it looks like they were afraid of getting caught. I don't know much about SDIRA to get into it.
So how much is your custodian charging annually for their service?
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Bob,
For the reason you mentioned above, I've been debating on what to do with my IRA money in the stock market. If my housing bet is correct, my IRA will be a small fraction of my networth so it can go in the toilet for all I care. At this point, I'm leaving the money in my IRA as part of my safety net. However, how much of a safety net if it tanked from $200k to $100k like 2007 to 2009? :)
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E-man says
Depends on what you do. Just deposits coming into the account like me is $300 a year for 100k to 250k in assets. See the sterling trust website, they're out of waco tx.
Housing can tank also, but in my area it never really went up much and didn't go down all that much. The new mcmansions in the upscale area's took the biggest beating. Not my style anyway. I've been buying in the very good, but older well established area's. What is now called mid century modern architecture.
I have no clue how the market values went up to or down to on my properties in the last 10 years. I don't care, I'm solely looking for rental income after I retire.
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There are multiple vehicles, self-directed 401Ks and IRA-LLCs. I don't think the advantage is that you can invest in housing or any other vehicle, the real advantage is that you can easily park/invest your money in foreign currencies and counteract/hedge against the dollar-debasement.