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Old 06-24-2019, 11:46 AM
 
485 posts, read 660,018 times
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Quote:
Originally Posted by bad debt View Post
I think the really tax advantageous way to do it would be to have an IRA purchase the land with 100% cash. Then set up another entity to ground lease the land from the IRA and perform the actual vertical development on the land and fund this with as much debt as possible. The vertical entity gets to depreciate 100% of its basis in the property, write off the mortgage expense and ground lease payments. The land entity would have to recognize the ground rent income, but since it's a Roth IRA it wouldn't matter.
That's what I was thinking. have the Roth IRA pay for all land and construction costs so the "ROTH" would own the second unit outright. Then, any rental income (minus taxes, maintenance, etc.) would be reinvested back into a ROTH and its growth tax free. Plus the ROTH also own the value of the property.

Bringing the ROTH into the equation allows me to search for a larger lot to fit two units. I will legally separate them so I'm not co-mingling the funds. The other unit will be my primary residence and I could use the ROTH to make this happen.

So, when I reach retirement age I will essentially own the ROTH property (already paid for), the entire accumulated sum of the profit generated from rental income (tax free and mostly invested back into mutual funds), the primary residence unit and then any growth on that if I decided to save it.

My alternate is to find a small enough lot to only build one unit.

I'm ultimately trying to do this deal myself to 1) find a small lot in the city that may be undesirable for larger homes, 2) avoid maintenance fees associated with shared townhouses/condo properties and 3) see how low I can get building costs down...I'm an architect so I can see what I am able to do.

Also, Texas has some of the highest property tax percentages in the typical so I'm trying to find ways around the typical racket. You basically choose what you want to pay on taxes based on the property value of your home.
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Old 06-24-2019, 06:47 PM
 
Location: Formerly Pleasanton Ca, now in Marietta Ga
5,486 posts, read 4,096,685 times
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Before you do all this I really think you better talk to a few experts. I am certain you are engaging in prohibited transaction. Wouldn’t be good to find The Whole Roth is disqualified years down the road and you have to pay back taxes and penalties.
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Old 06-24-2019, 09:38 PM
 
6,973 posts, read 3,870,340 times
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Quote:
Originally Posted by aslowdodge View Post
Before you do all this I really think you better talk to a few experts. I am certain you are engaging in prohibited transaction. Wouldn’t be good to find The Whole Roth is disqualified years down the road and you have to pay back taxes and penalties.
His plan is interesting; what part of it do you believe is in violation of the rules for a Roth?
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Old 06-24-2019, 10:30 PM
 
Location: Formerly Pleasanton Ca, now in Marietta Ga
5,486 posts, read 4,096,685 times
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Quote:
Originally Posted by kokonutty View Post
His plan is interesting; what part of it do you believe is in violation of the rules for a Roth?
You can’t be personally involved with any of the IRAs assets. You can’t use the real estate in the Ira to rent or sell to yourself which is basically what he is trying to do. You are not supposed to do any of the work yourself or self manage the property that is owned by the Ira. This includes immediate family like buying a house in the Ira and renting it to your kids or spouse or having them work on it.
If this was possible I would have done it years ago with mine.
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Old 06-25-2019, 12:13 AM
 
6,973 posts, read 3,870,340 times
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Quote:
Originally Posted by aslowdodge View Post
You can’t be personally involved with any of the IRAs assets. You can’t use the real estate in the Ira to rent or sell to yourself which is basically what he is trying to do. You are not supposed to do any of the work yourself or self manage the property that is owned by the Ira. This includes immediate family like buying a house in the Ira and renting it to your kids or spouse or having them work on it.
If this was possible I would have done it years ago with mine.
Yes, that is the basic ruling but it looks like he's trying to find a way to insulate the Roth from the holder. I'd be surprised if the laws didn't have a loophole or two such as through a trust or corporation. Can the maintenance and management be contracted through a company the holder owns or owns a part of?
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Old 06-25-2019, 08:26 AM
 
Location: Formerly Pleasanton Ca, now in Marietta Ga
5,486 posts, read 4,096,685 times
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Quote:
Originally Posted by kokonutty View Post
Yes, that is the basic ruling but it looks like he's trying to find a way to insulate the Roth from the holder. I'd be surprised if the laws didn't have a loophole or two such as through a trust or corporation. Can the maintenance and management be contracted through a company the holder owns or owns a part of?
Well you never know unless you talk to an expert. I understand what he is trying to do but I believe there is no way to isolate himself by using a company he owns. In the end he wishes to be the 100 percent beneficiary in the end utilizing the company which means he would likely have to be 100 percent owner. I posted earlier about prohibited transactions.
It seems like he would be engaging in at least one if not more of these circumstances.
As I said, it would be a shame to set this up and many years later get taxed and penalized for it.
See
https://www.irafinancialgroup.com/le...cted-roth-ira/

definition of a “disqualified person” (Internal Revenue Code Section 4975(e)(2)) extends into a variety of related party scenarios, but generally includes the Roth IRA holder, any ancestors or lineal descendants of the Roth IRA holder, and entities in which the Roth IRA holder holds a controlling equity or management interest. In essence, under Code Section 4975, a “Disqualified Person” means:

A fiduciary (e.g., the Roth IRA holder, participant, or person having authority over making Roth IRA investments),
A person providing services to the plan (e.g., the trustee or custodian),
An employer, any of whose employees are covered by the plan (this generally is not applicable to Roth IRAs but dos include the owner of a business that establishes a qualified retirement plan),
An employee organization any of whose members are covered by the Plan (this generally is not applicable to Roth IRAs),
A 50 percent owner of C or D above,
A family member of A, B, C, or D above (family members include the fiduciary’s spouse, parents, grandparents, children, grandchildren, spouses of the fiduciary’s children and grandchildren (but not parents-in-law),
An entity (corporation, partnership, trust or estate) owned or controlled more than 50 percent by A, B, C, D, or E. Whether an entity is a disqualified person is determined by considering the indirect stockholdings/interest which would be taken into account under Code Sec. 267(c), except that members of a fiduciary’s family are the family members under Code Sec. 4975(e)(6) (lineal descendants) for purposes of determining disqualified persons.
A 10 percent owner, officer, director, or highly compensated employee of C, D, E, or G,
A 10 percent or more partner or joint venturer of a person described in C, D, E, or G.
Note: brothers, sisters, aunts, uncles, cousins, step-brothers, step-sisters, and friends are NOT treated as “Disqualified Persons”.

Self-Directed Roth IRA Prohibited Transactions

Pursuant to Internal Revenue Code Section 4975, a Self Directed Roth IRA is prohibited from engaging in certain types of transactions. The types of prohibited transactions can be best understood by dividing them into three categories: Direct Prohibited Transactions, Self-Dealing Prohibited Transactions, and Conflict of Interest Prohibited Transactions.

Direct Prohibited Transactions

Subject to the exemptions under Internal Revenue Code Section 4975(d), a “Direct Prohibited Transaction” generally involves one of the following:

4975(c)(1)(A): The direct or indirect Sale, exchange, or leasing of property between an IRA and a “disqualified person”

Example 1: Tim sells an interest in a piece of property owned by his Roth IRA to his son.

Example 2: Cindy leases real estate owned by her Roth IRA to her father.

Example 3: Jerry uses his Roth IRA funds to purchase an LLC interest owned by his son.

4975(c)(1)(B): The direct or indirect lending of money or other extension of credit between an IRA and a “disqualified person”

Example 1: Paul lends his wife $10,000 from his Roth IRA.

Example 2: Jill personally guarantees a bank loan to her Roth IRA.

Example 3: Bill uses Roth IRA funds to lend an entity owned and controlled by his mother $60,000.

4975(c)(1)(C): The direct or indirect furnishing of goods, services, or facilities between an IRA and a “disqualified person”

Example 1: Rick buys a piece of property with his Roth IRA funds and hires his father to work on the property.

Example 2: Betsy buys a home with her Roth IRA funds and personally fixes it up.

Example 3: Nicky owns an apartment building with her Roth IRA and hires her father to manage the property.

Indirect Prohibited Transactions

4975(c)(1)(D): The direct or indirect transfer to a “disqualified person” of income or assets of an IRA

Example 1: Allan is in a financial jam and takes $18,000 from his Roth IRA to pay his mortgage and credit card bill.

Example 2: Larry uses his Roth IRA to purchase a rental property and hires his friend to manage the property. The friend then enters into a contract with Larry and transfers those funds back to Larry.

Example 3: Tracy invests her Roth IRA funds in a real estate fund and then receives a salary for managing the fund.

Self-Dealing Prohibited Transactions

Subject to the exemptions under Internal Revenue Code Section 4975(d), a “Self-Dealing Prohibited Transaction” generally involves one of the following:

4975(c)(1)(E): The direct or indirect act by a “Disqualified Person” who is a fiduciary whereby he/she deals with income or assets of the IRA in his/her own interest or for his/her own account

Example 1: Beth who is a real estate agent uses her Roth IRA funds to buy a home and earns a commission from the sale.

Example 2: Jim wants to buy a piece of property for $150,000 and would like to own the property personally but does not have sufficient funds. As a result, Jim uses $120,000 from in his Roth IRA and $30,000 personally to make the investment.

Example 3: Jen uses her Roth IRA funds to invest in a real estate fund managed by her Son. Jen’s son receives a bonus for securing Jen’s investment.

Conflict of Interest Prohibited Transactions

Subject to the exemptions under Internal Revenue Code Section 4975(d), a “Conflict of Interest Prohibited Transaction” generally involves one of the following:

4975(c)(i)(F): Receipt of any consideration by a “Disqualified Person” who is a fiduciary for his/her own account from any party dealing with the IRA in connection with a transaction involving income or assets of the IRA.

Example 1: Craig uses his Roth IRA funds to loan money to a company in which he manages and controls but owns a small ownership interest in.

Example 2: Tiffany uses her Roth IRA to lend money to a business that she works for in order to secure a promotion.

Example 3: Jason uses his IRA funds to invest in a hedge fund that he manages and where his management fee is based on the total value of the fund’s assets.

Statutory Exemptions

Under Internal Revenue Code Section 4975(d), Congress created certain statutory exemptions from the prohibited transaction rules outlined under Internal Revenue Code Section 4975(c). For these certain transaction, Congress believed there is a legitimate reason to permit them. For these transactions, Congress has issued a blanket statutory exemptions permitting these transactions assuming that certain requirements specified are satisfied. Below is a list of some of the statutory exemptions found in Internal Revenue Code Section 4975(d) that apply to Roth IRAs:

Any contract with a disqualified person for office space, legal, accounting or other services necessary for the operation of the Roth IRA as long as reasonable compensation is paid. Note – this exemption does not apply to a Roth IRA fiduciary (the Roth IRA holder) as per Treasury Regulation Section 54.4975-6(a)(5).
The provision of ancillary services to a Roth IRA by a bank trustee
receipt by a disqualified person of any benefit to which he may be entitled as a participant or beneficiary in the plan, so long as the benefit is computed and paid on a basis which is consistent with the terms of the plan as applied to all other participants and beneficiaries;
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Old 06-25-2019, 11:24 AM
 
90 posts, read 20,194 times
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You're both right. You can't do it if you are leasing it to yourself (i.e. it is the same person involved in both parties). However, I can assure you that that structure I described does and can work but it would require multiple people's IRA's to be the land owner such that none of them have more than a 50% interest in the venture.

Aslowlodge is also correct in that if you're really contemplating something like this you need to get professionals (CPAs & real estate attorneys) involved.
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Old 06-25-2019, 12:00 PM
 
485 posts, read 660,018 times
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Quote:
Originally Posted by bad debt View Post
You're both right. You can't do it if you are leasing it to yourself (i.e. it is the same person involved in both parties). However, I can assure you that that structure I described does and can work but it would require multiple people's IRA's to be the land owner such that none of them have more than a 50% interest in the venture.

Aslowlodge is also correct in that if you're really contemplating something like this you need to get professionals (CPAs & real estate attorneys) involved.
I would not be leasing it to myself.

Unit A: (50% of land cost of whole lot + mortgage of construction) will be paid entirely by me. I would live in this unit and it will be paid and maintained by non-retirement money.
Unit B: (50% of land cost + construction cost would be paid for by my Roth IRA). I would then hire an outside management company to "rent" out Unit B to an outside tenant (not me). The profit (income-expenses, maintenance taxes, etc.) would be reinvested back into my Roth IRA account the same way dividends are reinvested.

yes, it would need to talk to a professional but I am planning on keeping the 2 units separate from a legal and monetary standpoint.
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Old 06-25-2019, 02:30 PM
 
Location: Formerly Pleasanton Ca, now in Marietta Ga
5,486 posts, read 4,096,685 times
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Quote:
Originally Posted by H'ton View Post
I would not be leasing it to myself.

Unit A: (50% of land cost of whole lot + mortgage of construction) will be paid entirely by me. I would live in this unit and it will be paid and maintained by non-retirement money.
Unit B: (50% of land cost + construction cost would be paid for by my Roth IRA). I would then hire an outside management company to "rent" out Unit B to an outside tenant (not me). The profit (income-expenses, maintenance taxes, etc.) would be reinvested back into my Roth IRA account the same way dividends are reinvested.

yes, it would need to talk to a professional but I am planning on keeping the 2 units separate from a legal and monetary standpoint.
I understand what you are trying to do but you're not getting it. You can't partner up with your IRA. The lot must be split prior to purchase and you must buy one lot and the ira the other. You also can't buy the lot under one entity and then split it and sell it to the other because your IRA can't sell to yourself nor can you sell to your IRA.

The costs for construction must be separated. Two separate loans and projects. Separate (not connected units) buildings must be built. Townhouses would be considered one building that you are trying to share with your IRA. You cannot personally partner with your IRA in any manner.

When I set up my Roth IRA you can bet I looked into situations like this already. I used a company specializing in setting these accounts up.

But if you really feel you are correct and I am wrong, please share your findings
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Old 06-25-2019, 02:32 PM
 
Location: Formerly Pleasanton Ca, now in Marietta Ga
5,486 posts, read 4,096,685 times
Reputation: 7298
Quote:
Originally Posted by bad debt View Post
You're both right. You can't do it if you are leasing it to yourself (i.e. it is the same person involved in both parties). However, I can assure you that that structure I described does and can work but it would require multiple people's IRA's to be the land owner such that none of them have more than a 50% interest in the venture.

Aslowlodge is also correct in that if you're really contemplating something like this you need to get professionals (CPAs & real estate attorneys) involved.
I don't know if that will work, but regardless his other identity would certainly have more than 50% ownership based on his plan. He makes no mention of involving anyone else in ownership except himself.
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