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tgaspard

Self Directed IRA

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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 very

informative!  This is the second time I heard you speak and I've really

been

thinking about possibly opening an account myself.  But as I was driving

home 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 to

rehab the property (not rehab myself of course) - and then sell the

option

after rehab - that this is okay in a self directed IRA.  But my question

is

if I was to do the same thing over and over again, does this look like a

business and would UBIT have to be paid?

 

My problem is that I'm thinking that all those stories you showed to us

yesterday are great if done once.  But if you do the same thing over and

over 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 a

business.  The way I like to phrase it is "Piglets get fed, but hogs get

slaughtered."  For example, in IRS Publication 598, which is the

publication dealing with UBIT, there is an example talking about being a

dealer in stock options.  True, this is not quite analogous, but I think

it demonstrates a basic principle:  If it looks like a duck, walks like

a duck, and sounds like a duck, its probably a duck, whether you call it

a dog or not.  In other words, if what you're doing sounds like a

business, 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 rely

on in this area.  So a lot of opinions are educated guesses, even from

the people who live and breathe this stuff every day.  Your best bet is

to use the IRA as it was intended to be used - for investments.  Mix it

up a bit.  Loan some money out.  Buy and house.  Get an option, but

don't get 10 options and cancel every one of them for huge profits.  I

hope 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 taxes

are.  The answer is fairly complicated because it depends on how you

look at it.  UBIT only attaches to the portion of the income that comes

from debt financing, unless of course you are running a business in the

IRA.  The first $1,000 of UBIT income is free of the tax.  Once you get

to 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 are

equal to the tax rates for trusts.  You can find more details in IRS

Publication 598, Form 990T and the instructions for Form 990T.  Since I

could give a 2 hour lecture just on UBIT, it's pretty hard to answer the

question 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

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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....

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