tgaspard 0 Report post Posted June 29, 2004 For those who always wanted to know if you can do these kinds of deals in your IRA. I went to a talk yesterday by Quincy Long. He is an attorney and owner of the Houston branch of "Entrust". Most of us know that you can buy real estate in a IRA when used with a third party custodian. "Entrust" is one of a few third party custodian. I pushed my hand up and he answered "yes, you could do a sandwich deal in an IRA". In-fact you pretty much could do anything in MC's book within your IRA. He even had gave out a written example of a option placed on a property which was then assigned for profit in the IRA - tax free. Sounds to good to be true? Well, in fact it might be to good to be true. I sent him the following email today concerning UBIT (unrelated business income tax). Mr. Long I was at your talk yesterday in Pasadena of which I must say was veryinformative! This is the second time I heard you speak and I've reallybeenthinking about possibly opening an account myself. But as I was drivinghome last night, a question formed in my mind that I wanted to ask. I understand that if I have an option on a property - have the right torehab the property (not rehab myself of course) - and then sell theoptionafter rehab - that this is okay in a self directed IRA. But my questionisif I was to do the same thing over and over again, does this look like abusiness and would UBIT have to be paid? My problem is that I'm thinking that all those stories you showed to usyesterday are great if done once. But if you do the same thing over andover again would this be a business in the IRA? Also one more thing - how much is the UBIT tax? And here is his answer Mr. Gaspard: An excellent question! The answer to your question is that, yes,anything you do over and over again has the danger of being called abusiness. The way I like to phrase it is "Piglets get fed, but hogs getslaughtered." For example, in IRS Publication 598, which is thepublication dealing with UBIT, there is an example talking about being adealer in stock options. True, this is not quite analogous, but I thinkit demonstrates a basic principle: If it looks like a duck, walks likea duck, and sounds like a duck, its probably a duck, whether you call ita dog or not. In other words, if what you're doing sounds like abusiness, it will probably be considered to be a business by the IRA.They absolutely look at form over substance. Having said all of this,it's also true that there are very few cases and letter rulings to relyon in this area. So a lot of opinions are educated guesses, even fromthe people who live and breathe this stuff every day. Your best bet isto use the IRA as it was intended to be used - for investments. Mix itup a bit. Loan some money out. Buy and house. Get an option, butdon't get 10 options and cancel every one of them for huge profits. Ihope this helps. Quincy Long He then further replied with this Mr. Gaspard: I realized that I did not answer your question about how much UBIT taxesare. The answer is fairly complicated because it depends on how youlook at it. UBIT only attaches to the portion of the income that comesfrom debt financing, unless of course you are running a business in theIRA. The first $1,000 of UBIT income is free of the tax. Once you getto the net UBIT income amount, however, the tax rises to 35% at under$10,000 of UBIT income. Because an IRA is a trust, UBIT tax rates areequal to the tax rates for trusts. You can find more details in IRSPublication 598, Form 990T and the instructions for Form 990T. Since Icould give a 2 hour lecture just on UBIT, it's pretty hard to answer thequestion succinctly. Quincy Long So really the answer is yes and no. You can do these kind of deal in your IRA - just don't make it look like a business. The IRS still want to tax you on intent! If their "read you mind" machine says it looks like a business then you must pay a tax. You just never know what the IRS is going to do. Make a lot of money in your IRA and they just may come after you! Todd Share this post Link to post Share on other sites
MichaelC 160 Report post Posted June 30, 2004 Interesting topic, Todd. Thanks for sharing. Share this post Link to post Share on other sites
-Tony- 0 Report post Posted July 2, 2004 Okay, I have been thinking about this before and thought how you could get some cash and some IRA $. COULD YOU set up a l/o with your IRA l/o to your llc for only 1/2 of what the option $, cash flow and back end would be? Then turn around find a t/b with your llc. Now your splitting an sandwich deal with your llc...right??? My one concern is you set up an llc to protect your ASSets but the way some of these guys tell you to do it you have no protection for your ira account.... Share this post Link to post Share on other sites