BUYING REAL ESTATE WITH AN IRA AND A NON-RECOURSE LOAN

[Pages:32]BUYING REAL ESTATE WITH AN IRA AND A NON-RECOURSE LOAN

BY: Mathew Sorensen, Partner KYLER KOHLER OSTERMILLER & SORENSEN, LLP 3033 N. Central Avenue, Suite 415 | Phoenix, AZ 85012 Phone 602-761-9798 | | mat@ Serving Clients Nationwide From Our Offices in Arizona, Utah, and California

BY: Roger St.Pierre, Sr. VP FIRST WESTERN FEDERAL SAVINGS BANK roger@ Phone 800-908-8845

Disclaimer & About Mat

DISCLAIMER

All information and materials are for educational purposes only. All parties are strongly encouraged to consult with their attorneys, accountants, and real estate professionals before entering into any type of investment. This presentation does not constitute an attorney client relationship.

ABOUT MAT

Partner at KKOS Lawyers, assisting clients nationwide from offices in Arizona, California, and Utah. Author of The Self Directed IRA Handbook: An Authoritative Guide for Self Directed Retirement Plan Investors and Their Advisors, an Amazon Best Seller and a textbook for the Retirement Industry Trust Association's Self Directed IRA Professional Designation Course where I'm also an instructor. The Self Directed IRA Handbook is already the most widely used book in the self-directed IRA industry.

First Western Federal Savings Bank, and its employees are not accountants, nor are we investment advisors, and we are not qualified to provide advice on IRA rules, regulations or

eligibility requirements. Please consult with your tax and investment

advisors.



What We're Covering Today

1. How a SDIRA invests into real estate 2. Why you must use a "non-recourse loan" 3. Non-Recourse loan terms, options, and lending requirements 4. Property analysis by investor and lender 5. UDFI Tax Explained in detail 6. Pro's and Con's of buying real estate in an IRA with a non-recourse loan

Why The SDIRA Real Estate Market is Growing?

In trillions



eData are estimated.

Note: For definitions of plan categories, see Table 1 in "The U.S. Retirement Market, Fourth Quarter 2013." Components

may not add to the total because of rounding.

Sources: Investment Company Institute, Federal Reserve Board, Department of Labor, National Association of Government Defined Contribution Administrators, American Council of Life Insurers, and Internal Revenue Service Statistics of Income

Division

Assets in individual retirement accounts (IRAs) totaled $6.5 trillion at the end of the fourth quarter of 2013, an increase of 5.3 percent from the end of the third quarter. Defined contribution (DC) plan assets rose 5.1 percent in the fourth

quarter to $5.9 trillion. Government pension plans-- including federal, state, and local government plans -- held $5.6 trillion in assets as of the end of December, a 5.6 percent increase from the end of September. Private-sector defined

benefit (DB) plans held $3.0 trillion in assets at the end of the fourth quarter of 2013, and annuity reserves outside of retirement accounts accounted for another $2.0 trillion.

How Does a Self Directed IRA Invest?

-Need a custodian (bank, credit union, trust company) for the IRA. - Common investments are real estate, private companies, LLCs, and precious metals.

The IRA/LLC Structure Basics

Rather than a self-directed IRA taking ownership and buying an asset directly through your Administrator/Custodian, the self-directed IRA purchases the ownership in the LLC and the LLC takes ownership of the asset. In many instances, the IRA Owner manages the LLC (subject to legal restrictions). This LLC can also use a non-recourse loan.

SELF DIRECTED

$$

IRA

$

IRA/LLC

Buys Property

Receives Rent

LLC Pays Loan Payments

Bank funds portion of purchase

- IRA invests $ into LLC Bank Account

NON-RECOURSE

- IRA Owner, Manager of LLC, No comp (Ellis v. Commissioner, case)

LOAN, BANK

- LLC acquires investment (e.g., property)

- Non-recourse loan funds a portion of the purchase price

- IRA owns LLC 100%, could be multiple IRA or parties owning different percentages

WHY MUST I USE A "NON-RECOURSE" LOAN

EXTENSION OF CREDIT PROHIBITED TRANSACTIONS

IRC ? 4975 (c)(1)(B) specifically states that a prohibited transaction occurs when there is a "lending of money or other extension of credit between a plan [IRA] and a disqualified person." RULES FOR OBTAINING A LOAN WITH YOUR IRA 1. If an IRA obtains a loan for its investments the loan must be "non-recourse" to the IRA and the IRA owner (e.g., lender's only recourse is against asset). The IRA owners cannot personally guarantee the loan. Peek & Fleck v. Commissioner. 2. UDFI Tax due on net income from debt. Profits attributable to retirement plan cash or other non-debt investment is not subject to UDFI tax. (more later on this). Applies to IRAs, 401ks other employed based plans are exempt from UDFI tax.

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