jump to navigation

Tax Return for UBIT – Does your retirement plan own leveraged real estate or an active business? April 15, 2009

Posted by Jeff Nabers in : Self Directed IRA Solo 401k , add a comment

Just a quick, last-minute reminder…

UBIT, or Unrelated Business Income Tax, applies to tax exempt organizations including retirement plans. To pay UBIT, Form 990-T must be filed with the IRS. If this is all news to you, once you are done scolding yourself, you may want to file for an extension using Form 8868.

How to profit from real estate investments in a soft and declining real estate market January 21, 2009

Posted by Jeff Nabers in : Self Directed IRA Solo 401k, real estate , add a comment

house bubble

Three years ago real estate investing was hot. Today, many people act as if the opportunity has passed. I contend that the opposite is true. In the past, as a mortgage banker focused on originating mortgages for investment properties, I started listening to and learning from my real estate investor clients and noticed two categories of real estate investors: real investors and blind investors.

Real Investors have the following in common:

Who will bail out the government? October 1, 2008

Posted by Jeff Nabers in : Money, Personal Enjoyment, Self Directed IRA Solo 401k , add a comment

Although the House rejected the recent $700 billion bailout, there is plenty of bailing out that has already happened, and there is more to come. Already:

Hundreds of billions of dollars have already been injected into the system as seen on this timeline. It’s been happening every couple of months – 5, 10, or 20 billion dollars at a time. That kind of help hasn’t helped enough, and the $700 billion bailout is a sign that zeros will soon be added to the bailouts, and they will total in the trillions of dollars.

What happens to a company that gets bailed out?

How will our government pay for this?

Firstly, it’s important to understand that (more…)

Is this the bottom? How to recover your stock market losses September 30, 2008

Posted by Jeff Nabers in : Money, Self Directed IRA Solo 401k , add a comment

This question is on the minds of millions of Americans. I know exactly how to recover your losses: get out of the U.S. stock market and recoup your losses elsewhere.

S&P 500 loses 28% in one year

The sales pitch of securities salesman is that the stock market goes up around 8% or 9% per year over the long run – so don’t ever sell as a reaction to losing money. Let’s examine this, and assume your investment performance equaled the S&P 500 (even though the majority of mutual funds’ performance is inferior to that of the S&P 500).

Scenario A – You entered the (more…)

Unrelated Business Income Tax – UBIT for Solo 401(k) & IRA accounts June 26, 2008

Posted by Jeff Nabers in : Self Directed IRA Solo 401k, real estate , add a comment

If you talk to the average CPA, he’ll tell you that UBIT is the boogeyman and is to be avoided… always. Discussing this topic with an above average CPA (such as Eric Wikstrom of Integrated Wealth Strategies) yields different advice.

The Two Types of UBIT

  1. Triggered from a trade or business – if a tax exempt entity (such as an IRA or 401k) owns a trade or business, the income of that business is taxed at trust rates (i.e. very high tax rates). Both IRA & Solo 401k accounts are subject to this type of UBIT.
  2. Triggered from ownership of leveraged real estate – if a tax exempt entity (including IRA) owns real estate leveraged with a mortgage loan, the portion of that income attributable to the mortgage loan is taxed at trust rates. This type of UBIT is specifically referred to as UDFI – Unrelated Debt Financed Income. Solo 401k accounts & other qualified plans are exempt from UDFI.

Trust tax rates are very high, so it might make sense to avoid Type 1 UBIT at all costs. On the other hand, a close examination of UDFI tends to revoke its “boogeyman” status.

The reason UDFI isn’t a detrimental cost is that non-recourse mortgage loans (the only type an IRA/401k can legally obtain) are typically only offered at a 65% loan-to-value maximum. So this means that the UDFI tax is only payable on up to 65% of the property’s net income. (That’s right – net income. You do get to deduct depreciation and other expenses before paying UDFI tax).

Let’s examine a simple comparison of the taxes payable on net real estate income with 50% leverage: (more…)

Self Honesty: Stock Market Strategies Worth Considering June 6, 2008

Posted by Jeff Nabers in : Self Directed IRA Solo 401k , add a comment

While I generally avoid mutual funds like the plague, I don’t avoid the stock market altogether. I’ll split what I do in the stock market into two categories: long and short. Either way, I’m honest with myself in admitting that no matter what I do in the stock market, it will be speculative and risky.

Long

“Going long” means buying a stock and expecting its price or income to rise so I can sell later for a profit. There are millions of people who have access to the same information as you, and that is generally reflected in the price of that stock. If you know something non-public about the company, trading it may be illegal for you. I’ve bought individual stocks before; I just treat the situation honestly; it is speculative in nature, and I only make such trades with very small portions of my portfolio.

I don’t go long on mutual funds because I don’t know what I’m going long on. It is virtually impossible to know what I’m actually investing in when I buy shares of a fund.

Short

Selling Short… A short position is the opposite of a long one. Instead of buying low and selling high, selling short is a matter of selling high and then buying low. For me to do this, I borrow shares of a stock and simultaneously sell them at the market price in expectation of a price decrease. To close this position later, I just have to buy back shares of the same stock at the then market price and pay back the borrowed stock. If during my position the stock price declined, I profit; if the stock price increased, I have a loss.

Ex: ABC Company seems to be doomed. It’s currently trading at $50, but I think it will go much lower over the next couple months. I sell 100 shares short. This means I borrow 100 shares and simultaneously sell them for $5,000. A few months later I see the stock price has declined to $35. To close my position, I buy 100 shares back for $3,500. I pay back the borrowed shares and retain the $1,500 profit, less fees and commissions.

I like short selling more than going long. I often notice (more…)

Loaning money to your IRA/401(k) May 20, 2008

Posted by Jeff Nabers in : Self Directed IRA Solo 401k, real estate , add a comment

Do you have an IRA/401k-owned investment property that has a mortgage and negative cash flow?

Something I’ve been running into lately is Self Directed plan investors who speculatively bought a house or condo in previously hot markets (think Vegas, Florida, Phoenix, etc). Some of these areas have experienced declining values and declining rental income for short term rental properties.

If your plan (IRA or 401k) bought a house & obtained a non-recourse mortgage loan qualified based on short term rental income that has declined, you probably have negative cash flow. How can you avoid foreclosure? Loan money to your IRA/401k.

Loaning money to your IRA or 401k

A little known (more…)

Grading Promoters – Fairpointe… B May 1, 2008

Posted by Jeff Nabers in : Self Directed IRA Solo 401k , add a comment

I ran across a site advertised on Google today – www.coloradodeedsoftrust.com – run by a company called Fairpointe. This post is just my initial opinion from reviewing their web site. I haven’t spoken with or met these people or anyone who has done business with them. Once I have I will post an update.

Fairpointe offers self directed IRA investors the ability to invest in deeds of trust for properties in Colorado. A deed of trust is essentially a mortgage. Fairpointe’s site says in one place that the minimum investment amount is $25,000, while in another place they claim it’s $50,000. Either way, I immediately can respect what they are promoting more than those who promote putting all your retirement funds into one or two pieces of real estate through direct ownership. They also seem to allow, possibly encourage, forming an investment group so that each investor can invest a smaller amount which allows for diversification. I like the sound of that.

In the past, I’ve run across self directed IRA/401k promoters who really bash the stock market. Usually it’s in a very emotional way that just comes across as a cheap shot, and those people lose credibility in my book. Now, Fairpointe on the other hand does oppose the stock market, but in an interesting way. They point out what I believe to be the single misunderstood fact about numbers, math, money and investing. In fact, I think that the securities industry would not exist if everyone understood this concept:

Lying averages

Ever heard the phrase “numbers don’t lie”? Oh, yes they do. If 4 different investment portfolios each start at the same time, start with the same amount of principal, experience different gains/losses each year, but have the same average return during a period of time, would they perform the same during that period of time? No.

While many people believe (more…)

Solo 401(k) Nonrecourse Loans Now Available April 15, 2008

Posted by Jeff Nabers in : Self Directed IRA Solo 401k , add a comment

For many real estate investors, leverage is a key factor to their plans for profits – leverage in the form of mortgage financing. When you introduce mortgage financing into Self Directed IRA ownership of real estate, a special tax called Unrelated Business Income Tax (UBIT) is triggered. The tax often isn’t detrimental as will be covered in another post, but nonetheless it reduces the profit.

For the self employed, a fantastic development has occurred over the past few years – the Solo 401(k). One distinct advantage of the Solo 401(k) over an IRA is that it is not subject to paying UBIT on profits from financed real estate. Eliminating UBIT by using a Solo 401(k) eliminates the need to file a return (Form 990-T) as well as the accompanying tax. Sound pretty good so far?

The difficulty in recent times has been obtaining nonrecourse financing. The leader of NR financing in the Self Directed IRA industry for the past few years has been North American Savings Bank. Last year, they took the familiarity of IRA lending and applied it to Solo 401(k). Unfortunately for many Solo(k) investors, this has only been available to plans who choose to name a custodian as trustee of the plan. Qualified plans (which is what all 401k plans are) are different than IRAs in that they are not required by law to (more…)

Increasing buying power March 19, 2008

Posted by Jeff Nabers in : Self Directed IRA Solo 401k , add a comment

These are the primary ways of increasing buying power when putting real estate into a retirement account:

  1. Mortgage financing – This has to be in the form of a non-recourse loan, which is typically limited to about 70% LTV. This can double or sometimes triple your buying power, allowing you to have three assets instead of one.
  2. Buy cheaper assets – Instead of buying property in San Francisco, consider buying property in the midwest – it will probably provide better cash flow and will be less susceptible to severe price corrections. This may also involve a mental shift away from aiming solely for appreciation. This increases your buying power in the sense that you can afford to hold more lower priced properties.
  3. Partner with others – This is by far the most powerful way to increase buying power. There’s no limit to how many partners you can have and how much they can co-invest.

Partnering with others is essential for the self directed IRA/401k investor who has less than $1,000,000 in his account. Here’s where it gets tricky:

Securities

When investing into a venture, the investment can often be a security as interpreted by the SEC. This brings in a whole new set of rules and complexities. My next post will be about how to get rid of the complexities and eliminate the security.