Utilizing an IRA for facilitating transactions in Real Estate

This morning I would like to discuss utilizing an IRA for facilitating transactions in Real Estate as well as an ugly truth regarding some of the pitfalls and potential problems with IRA strategies being implemented in today’s market.

I currently have a number of partners, lenders and know of a number of associates who utilize IRA funds to invest in real estate. When this strategy is implemented correctly it is a true Win-Win for all parties. (Pun fully intended) The owner of the IRA is able to lend funds for real estate transactions which are secured by a deed of trust and as the lender they are added as an additional insured on the property owner’s insurance policy as well as receive tax deferred double digit returns paid directly into their IRA. Secured by a real tangible asset and insured against any tragic event, AND tax deferred double digit returns….. it doesn’t get any better in my opinion.

However, there are some pitfalls and issues I would like to raise some attention to.

A number of years ago I was contacted by a well recognized IRA rollover company to put on some seminars together. They were attempting to sell me on the idea of raising investment capital for flipping through IRA’s. The idea sounded interesting, and to that point in my career I had very limited experience with the process.

I had, however, utilized the process one time to raise capital for a custom home I built in the mid 2000’s. That process was painstaking yet successful. The main criteria I remembered from that process years ago was a custodian HAD to manage the funds dispersement as well as receiving interest and principle payments. If the owner of the IRA ever touched the funds by even simply cutting or receiving a check directly from or to the IRA, ALL funds in the IRA would be exposed as taxable ordinary income. This would mean if someone had hundreds of thousands of dollars in their IRA, and they directly cut a check for a couple of hundred dollars or directly received a small interest payment, ALL funds would be exposed as taxable income. This was hammered in by the custodian of the IRA, because the owner and I had multiple business dealings outside of this deal and he wanted to make sure we didn’t exchange checks directly in person by accident.

Therefore, years ago when this company reached out to me, I was fascinated to hear that this company, and as it turns out a number of other firms who supposedly specialized in IRA real estate investing, were marketing how to roll 401k funds into an IRA which could be structured as a “check book” controlled IRA.

With my past experience in mind, I was extremely concerned due to the potential exposure any of their clients may have. So I did a little research on how this was being structured. They were basically starting an LLC for the owner of the IRA and structuring a loan from the IRA to the LLC to allow the owner of the IRA/LLC “check book control”. After reviewing the process, I was not able to gain a level of confidence that they were doing enough to insulate the funds through their process, but I thought to myself….well they are very experienced, probably have good lawyers and accountants so they probably have it all figured out. However I was still not comfortable being associated with them so I passed on the offer and did not do any seminars with them.

A couple of weeks later, I ran into a nationally recognized author and tax attorney I knew, and I asked his opinion on the structure. We had a long drawn out discussion about the subject and their structure. His response was absolute shock and HORROR! He expressed grave concerns about the very probable exposure of the IRA funds (and its turns out he was very familiar with the company and their practices) He also stated concerns over the many other companies facilitating the same thing.

He did state that the process was a grey area at best, however in his opinion the owner of the IRA should NEVER have anything close to “checkbook control” of the funds. The risk is far too great to have the all funds in the IRA completely exposed as taxable ordinary income. In addition, there are too many ways to structure it cleanly and insure the security of keeping the funds tax deferred. He also pointed out that “Grey area” and IRS don’t really go very well together. Especially concerning tax deferred IRA’s. Could you all imagine the repercussions and implications of this structure being audited and all those funds from all those people who are implementing this strategy being exposed to taxable ordinary income? It would be devastating for so many people!

At that point, I still was interested in utilizing IRA for my business but I wanted to make sure it was structured correctly and the IRA funds were fully protected. I was referred to a company I was able to fully vet out, and I have since been working hand in hand with that company for all of our IRA deals. Obviously I did not do any seminars with the company who approached me, and since then I have been raising the same red flag I am raising in this blog/post. If you are utilizing this structure for your real estate investing, PLEASE insure that your reach out to your accountant and tax attorney to insure you are protected.

We use Equity Trust of Ohio for all deed of trust IRA loans for flips or buy and holds. They are all secured by a deed of trust on the property and the IRA is added to our insurance policy as an additional insured. The IRA receives double digit interest returns in addition to a % participation in the distributable profits paid in the form of additional interest at close. If you are interested in this process feel free to PM me or send me an email at jmay@win-wintransactions.com and have a great Friday all!