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Full Show Notes
Chris Tanner’s company website: www.ndtco.com
Chris’s email: firstname.lastname@example.org
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Hard assets are physical real estate, raw land, single family homes, apartment buildings, precious metals, etc.
Key distiction between a truly self-directed IRA plan and a limited selft-directed plan is the ability to hold hard assets.
Fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties. Usually, a fiduciary takes care of money or assets for someone else.
The IRA has a different EIN number of itself.
For IRA accounts, there has to be either a bank or a trust company acting as custodian.
For 401K accounts, there is no need for a custodian.
You only need a SSN to open an IRA account. A 401K or solo 401K requires a business entity.
You can use debt to buy properties with a self-directed IRA account. You need to use non-recourse loans.
I meant to say distribution at the end of the sentence there.
UBIT Tax: Unrelated Business Income Tax
For a leveraged property, you might have to pay UBIT tax for income above $1,000. However, you can deduct your expenses like any other property.
Chris Tanner 0:02
If you were to invest with a typical financial institution, their idea of diversification is to buy a lot of public securities. And maybe you buy a mutual fund or maybe you buy like the s&p 500. So your level of security is that you’re invested in a lot of companies.
Chris Tanner 0:23
The upside to that is that if one company doesn’t do well, it doesn’t impact all your holdings. The downside is is that for most people, when the stock market, you know, the security markets drop, everything drops. So the interesting thing about real estate is, you can still be profitable and you can still make money, regardless of what Wall Street or the stock market is doing.
Welcome to the show, you are listening to the real estate lab podcast. In this lab, we decode the stories, secrets and skills of the most brilliant minds in real estate investing and turn their wisdom practical advice and knowledge that we can use to boost our income. And now let’s turn it over to our host Vee.
It’s a great day to be alive and invest in real estate. My name is Vee Khuu and you’re listening to my show the real estate lab podcast, I want to welcome you to another episode of the podcast today. Our guest today is Chris Tanner. He is the business development manager at a new direction Trust Company, a leading provider of self directed retirement plans, Chris has personally utilized self directed retirement plans since 2006. More importantly, Chris has personally helped hundreds of people with the creation and management of their own self directed retirement plans. Chris has seen all the good, the bad, the ugly in the self directed retirement plans world now we strive to educate people on both the possibility and the risk of investing with self directed IRA.
You can get a hold of Chris by going to the company’s website. That’s www.ndtco.com his email is Ctanner@ndtco.com. He is also very active on LinkedIn so you’ll be able to get a hold of him on LinkedIn as well just find Chris Tanner TANNER. Before we get started I want to invite you to our free Facebook community head on over to www dot East West ventures dot CO slash AIMS to join. Hey and it doesn’t cost you anything to listen to this podcast. So if you like the show, head on over to iTunes and leave a review, subscribe and give me a five star rating. Now let’s turn it over to my conversation with Chris Tanner.
Welcome to another episode of the Real Estate lab podcast. And Chris thank you so much for jumping on with me today to record this episode.
Chris Tanner 2:57
Yeah, thank you, Vee, I am excited to be here and Appreciate you offering this opportunity and excited to hopefully share some information with your listeners?
Definitely I would I think they will find your knowledge very valuable to them. So, first of all, you are a specialist in the self directed IRA space. Not every company or not every IRAs are created equal. So what’s your niche your self directed IRA? How is it different than a conventional IRA or some like something that fidelity and Schwab offer?
Chris Tanner 3:37
Yeah, that that’s really a great question and a key thing to understand. So fidelity is a good example. But I would say most of the companies that offer retirement plan options, whether it’s an IRA or 401k. They offer what I would call publicly traded securities.
Chris Tanner 3:56
And so that’s going to be stocks, bonds or mutual funds and The company I work with new direction trust, we also allow people to invest in those types of securities. But where we’re really different is that we allow people to invest in hard assets.
Chris Tanner 4:14
And so some examples of hard assets would be physical real estate. And it doesn’t matter what form that is. It could be raw land, a single family house or commercial building and apartment. It allows people to invest in private companies, and allows them to invest in things like precious metals. So the big difference between what we do and what most of the traditional financial financial institutions do is we’re able to hold and value assets that most of the custodians don’t want to value. So for example, if you buy a stock, it’s very easy to just click a button on a computer and you know what the value of the stock is, right? Whereas you know, if you buy a ticket Real Estate, it takes a little more work to determine the value. So as a custodian we’re willing to, I guess hold those assets on people’s, you know, on their retirement plans behalf.
Okay, so you, so your company allow people to do hard asset but is it alright for those big companies to also allowed us because they can they allow you to select the plan or select the assets that you want to invest in? So I’m trying to see how different is it with the self directed that we’re talking about? And then the self directed that they those fidelity and the Schwab offer is they claim they have self directed IRA also.
Chris Tanner 5:44
Yeah, that’s true. Thank you for bringing that up. That’s a good point because I get calls. And people say, Well, I have a self directed plan. And what I would say a key distinction is, is if self directed from The traditional, whether it’s a fidelity or one of those companies, what that means is, there’s no one there to guide your choices. You’re basically making all your own decisions.
Chris Tanner 6:11
So there’s no financial planner involved. So it is self directed in the sense that you’re picking your own investments. The differences is you’re limited in what you can invest in. So real quick question that you can ask someone when they say we offer a self directed IRA, or whatever the plan happens to be, is asked them will, can I buy a physical piece of real estate with my retirement plan? If the answer is no, then you know, you have a sort of self directed plan. If the answer is yes, then it’s truly self directed.
Chris Tanner 6:48
And then just to be clear Vee. The IRS certainly allows people to invest in physical real estate and some of those things I mentioned earlier. It has nothing to Deal with IRS rules. The reason a company those big financial institutions don’t want to get into this market is it honestly it? From their perspective, it takes more time. There’s more, a little more paperwork a little bit more involved on their side, so it’s not worth it to them. And so that’s why it tends to be a little bit smaller companies like ours, that will actually offer people the option to buy real estate and precious metals and things like that.
Okay. So typically, for someone to convert over to your, your company, who is your ideal client.
Chris Tanner 7:39
So the ideal client is really someone that they found it investment that their current custodian won’t allow them to do. So very common example Vee is somebody maybe they have a private equity investment. So let’s just use an example of an apartment deal. So they’re able to buy in As a limited partner in an apartment complex, and it just so happens that the money they want to use is in an IRA or maybe it’s in a 401k. And when they go to their custodian, they realized that they can’t do it.
Chris Tanner 8:14
So they obviously have to find someone like us that offers that self directed option. And so the ideal client really, honestly is just anybody that wants to make an investment that’s not typically allowed by the more traditional firms. So I would just tell you that we have folks that have seven figure retirement accounts, and we have folks that have thousands of dollars. And so I don’t like to make qualifications based on the amount that’s in the retirement plan. Really, it just has to do with what what do you want to invest in?
And so when someone come come over to your company, they are truly directing Your company what to do, do you are not going to invest the funds into anything without them without their direction?
Chris Tanner 9:08
Yeah, that’s exactly right. That’s a good point. As a matter of fact, we are very specifically trained to not recommend, endorse or promote any specific investment. And so if somebody even asks us, you know, well, what, is there something out there or do you recommend anything we can’t recommend because we are not financial planners, we’re not fiduciaries.
Chris Tanner 9:33
And so when somebody brings their money over the money literally will just sit in that account until they make a decision to go ahead and invest it in something but yeah, you’re absolutely right. It really truly is self directed. We won’t do anything with those funds without the client giving us permission to make an investment.
Okay, and then I just want to circle back to what you said earlier regarding using the self directed Ira to, let’s say buy into a syndication of an apartment as a limited partner. So in that situation, how do you take title? Do you take it yourself or the new direction Trust Company takes title, or the IRA takes title?
Chris Tanner 10:15
You know what? That’s a great question. And what we don’t want to see is that keep in mind that it’s actually the retirement plan itself, that buying this asset. So if it happens to be this apartment, and there’s limited partner, we want to make sure it’s titled in the name of the IRA. We do not want it to be titled in the individual’s name because the individual has a social security number, and they’re a totally separate entity from their IRA.
Chris Tanner 10:45
Believe it or not, the IRA will have a different EIN number that we will utilize. But to answer your question, when we look at the titling for an IRA plan, it will actually show us on title as custodian and so for example our, my company’s called new direction Trust Company. So when we title something, it will look like the initials of our company, which is NDTCO as custodian.
Chris Tanner 11:12
And then we’ll say for benefit of, for me, it would be Chris Tanner IRA. So what we’re doing is we’re indicating the custodian, we’re indicating the account holders name, but we are also indicating it, it’s an IRA. Now, Vee.
Chris Tanner 11:28
There are some exceptions to that with an IRA, there has to be a custodian, but we do offer what are known as solo. 401k is a solo 401k is an employer type, retirement plan that can be self directed just like an IRA. The difference is, we offer those plans but we’re not technically a custodian.
Chris Tanner 11:50
And so in that situation, the 401k plan will literally have its own title that’s created when somebody establishes a TAX ID number so it will have its own unique titling, it will have nothing to do with us as a custodian. But the good thing is, is that we can help answer those questions. So obviously, when people come to us, we will look at the titling to make sure that it is done correctly because we don’t want there to be any mistakes.
Okay, and then can you talk a little bit more about the difference between the solo 401k, solo 401k, his solo Kay and the self directed IRA regarding how to form it how to what’s the max, you can contribute? per year?
Chris Tanner 12:35
Yeah, absolutely. And one of the things I would encourage your listeners to know is, it’s always worth a phone call. When you’re considering opening up one of these types of accounts to understand that there are options out there.
Chris Tanner 12:50
A lot of times people hear the word self directed IRA and they think that’s the only option available. And so when I talked to somebody on the phone, I like to try and determine what What would be a good fit for somebody?
Chris Tanner 13:02
So for some people, the self directed IRA is a better fit, and for others, the solo 401k is a better fit, but let me give you a feel of the difference. One of the differences relates to IRAs. And this is a rule that the IRS establishes there has to be a custodian, a custodian has to either be a bank or a Trust Company.
Chris Tanner 13:24
What’s different with the 401k is that there doesn’t need to be a custodian. The business that the 401k is attached to is the plan administrator. And so what that means is, we’re not necessarily involved directly in holding the money or sending the money off or investments the individual typically is.
Chris Tanner 13:51
So let’s talk a little bit about some of the differences. With an IRA. You just need a social security Number to open the account. So pretty much anybody can do that. a 401k or a solo 401k is a little bit different because there has to be a business entity. A 401k is a corporate retirement plan. So the entity can be pretty much anything it can be a sole proprietor, an LLC and S corp, the form of the entity doesn’t matter, but you have to have an entity, otherwise there cannot be a 401k plan. The 401k the contribution limits tend to be higher than the IRA. In 2019 IRA plans you can contribute either six or $7,000, depending on your age. So if you’re 50 or younger, you can contribute 6000 over 50, you can contribute 7000. With these 401k plans, I would just say in general, you can contribute roughly 10 times more and so those limits are 56,000 or 60. 2000 depending on your age, so certainly much higher contribution limits.
Okay, so I have a lot of friends who own their own businesses, either their own nail salons or haircut services, and they don’t have any kind of retirement planning at all. What so with them, would that be an ideal candidate for 401k plan? through your company?
Chris Tanner 15:30
It might be. And so the reason I say it might be is the plans that we offer specifically are for what I would call owner only businesses. And so if somebody owns a business where it’s them, maybe them and their spouse or they have children, but it’s really only owners and they don’t have full time employees. So like at the hair salon, if the hair stylists are They’re 1099. They’re not employees, but they’re almost like subcontractors, I think you’d be a good fit. But if the hair stylists are employees, and they’re being paid directly, and they make like a W2 from the business, probably not the best fit. And the reason I would say it’s not a good fit is what we find is a lot of times, the business owners are a little bit more entrepreneurial.
Chris Tanner 16:25
And it keep in mind what we offer self directed plans. They’re probably capable of handling and and working with these kinds of plans. When we’re talking about individuals that maybe don’t have a lot of investment experience. What we’re doing is we’re giving them a self directed plan, but they may not be ready to do that quite yet, if you get my drift. And so that might not be the best route for those individuals. But that would just be a conversation. The owner would know whether those employees are capable of doing that. And so it could be a fit or it may It really just depends.
Let’s just let’s just play that out. Let’s just say the owner created this plan. And the employees are 1099 employee, if they were to say they are interested in purchasing properties to rent out for, you know, for passive incomes, is that something that they can do?
Chris Tanner 17:24
Absolutely. Yeah. And so what the key thing to understand with the 1099 employees that although they’re working for the business, they’re not technically an employee. So what that means is that they’re 1099. They’re not able to participate in the plan if they’re kind of excluded from the plan, but for the business owner, that 401k plan works exactly like a self directed IRA. They can buy physical real estate, they can partner with other people to buy real estate. They really have all the options and all the flexibility within that 401k plan that they would have with the normal self-directed IRA.
Got it understood. Now, is there any limitation to what kind of transaction someone can and cannot do within a self directed IRA or solo 401k?
Chris Tanner 18:15
Yeah, that’s a great question. And I’m glad you brought that up. So, if Vee, if you were going out and you were wanting to buy a house, and you were using your personal money, there’s almost no limitation on what you could do. So let’s say you went out you bought a house and for some reason, you wanted your parents to live in that house, if you bought it personally, you could do that there’s no problems. Now with a retirement plan, and it doesn’t matter if it’s an IRA or 401k. The rules are the same for all of these retirement plans. There are some things that you got to be aware of.
Chris Tanner 18:51
And so the number one thing people need to be aware of is it’s not necessarily what you can invest in, but a lot of times, it’s who You are investing with. Here’s what I mean by that there are individuals that are considered prohibited or dis disqualified. What that means is the IRS has identified people who you cannot work with, or they cannot be involved necessarily in the deals. So let me use an example. This is kind of a common one, but some direct family members like your mother, your father, your wife, your children, so your son’s your daughters are actually prohibited. And so as an example, let’s say you have some children, they’re going to college, you couldn’t buy a rental house, and your children live in the rental house while they’re going to college. Your children are prohibited from using that property as are you and so you couldn’t buy a property. Maybe it’s a vacation property. We live in Colorado, maybe there’s a ski resort. Type townhome. You can’t go use that townhome or that condo if you bought it with retirement money so there are some rules around who you can invest with. And some basic rules about what you can invest in, I would say there’s very few things you cannot invest in, but a couple of those things would be collectibles. So a collectible could be like old cars that might have value as a result of their scarcity or work things like that. And you cannot invest in life insurance. And those are a couple of the basic categories of things you cannot invest in. But those other The others are have a lot more to do with who you invest with.
Okay, so I have to follow up questions then. Can you do crypto,
Chris Tanner 20:50
you can do crypto you bet.
OK Now going back to that example with a condo right say that say you purchase condo in Vail and you wanted to use it, but it’s a prohibited transaction because your IRA bought it. What if you paid your IRA to rent that same unit? Does that work is that allow?
Chris Tanner 21:16
Unfortunately no. Even if you were to go and rent it, like you would normally rent it, maybe somebody stays for a week and you’re renting even though you’re paying, the IRS would view that as a personal benefit. Even if you were paying the fair market rent, you know to go stay there for a week or however long it was unfortunately, they they just draw a line in the sand and they say no personal use. So in that situation, even though you were to go up to Vail, and your IRA bought the condo, unfortunately you couldn’t stay in that condo, even if you were paying fair market rent. So unfortunately the IRS is pretty clear about being able to personally use it. Whether as you You’re using it for one day or you’re living there all the time. Personal uses personally use them. So they they don’t really distinguish between how long you’re there or if you paid rent or not. It’s unfortunately, it’s a prohibited transaction.
So what would happen? What’s the worst case scenario? And what happened if you actually did a prohibited transaction?
Chris Tanner 22:21
That’s a good question. And this is going to be one of the differences between IRAs and 401Ks within an IRA if the IRS finds a prohibited transaction, the result pretty devastating. What happens is they they do what’s known as a distribution. So basically, the IRS will say you no longer have an IRA plan. We’re going to distribute the entire thing.
Chris Tanner 22:47
And so whatever value they place on it, that becomes taxable income to you. Not only will you have ordinary income tax, but if you’re younger than 59 and a half, they’re going to throw an additional 10% early withdrawal penalty on that. And there may be some penalties based on how far back the prohibited transaction goes on. Because they’ll charge you interest for the income tax you haven’t paid. So it could be pretty devastating. What I would count on for most folks is you could count on anywhere from 40 to 50%. tax on that, if it were to happen.
Chris Tanner 23:29
Now, let’s talk a little bit about a 401k. Because this is one of the differences between an IRA and a 401k. The penalties not as severe in a 401k. In a 401k, the penalty is limited to that specific investment. So Vee, let’s say for example, you have four investments in your 401k. And one of those investments was the Va il condo and you went up there and you stayed there. That’s perfectly debited, what they would do is they would put a 15% excise tax on that specific investment. And so wouldn’t be on the entire plan, it would just be on the one investment whereas the IRA, they penalize the whole plan. And so you can see where you might have four investments. And if you had one little investment, it would ruin the whole plan, so to speak. So it does depend on what kind of plan you have, what the penalty is, but I’ve talked with some attorneys and some lawyers and they said when you’re dealing with retirement funds, don’t get creative. Don’t get cute. play by the rules, because the penalty is it’s not worth it. And just be smart and use someone like myself or new direction trust, as you know, a place to seek advice. If you’re not sure. If this is allowed, please call will let you know will find an answer for you.
So then with all these limitations, And penalties involved. Why would someone even consider investing in real estate using their retirement funds, such as an IRA or 401k?
Chris Tanner 25:10
Yeah, you know, that’s a great question. And I and the honest truth is, is I think that’s up to the individual. And what I would say is it gives you a different type of diversification. You know, if you were to invest with a typical financial institution, their idea of diversification is to buy a lot of public securities. And maybe you buy a mutual fund or maybe you buy like the s&p 500. So your level of security is that you’re invested in a lot of companies.
Chris Tanner 25:43
The upside to that is that if one company doesn’t do well, it doesn’t impact all your holdings. The downside is is that for most people, when the stock market, you know, the security markets drop, everything drops. So the interesting thing about real estate is You can still be profitable. And you can still make money, regardless of what Wall Street or the stock market is doing. And so if in general, the markets doing poorly, as long as your rental income you have somebody renting and paying you every month, it’s not impacted by wall street.
Chris Tanner 26:20
So what I think it gives you a different kind of diversification. And another example is precious metals. You know what, it’s a personal decision if you think precious metals are a good investment, but there are certainly times in history. When the markets have done really well. And people, they tend to move to precious metals. And so there are certainly times when precious metals, for instance, do really well. And so it might be a hedge against inflation, or, you know, markets doing poorly. And I guess the idea is, is if you don’t have a self directed retirement plan, you don’t even have that option available. You can’t buy a rental property, you’re kind of stuck with Whatever they give you.
Okay, so when you purchase an investment property using your self directed IRA or solo 401k, do you have to have enough funds in your account to buy the entire property? Or can you take on debt?
Chris Tanner 27:16
That’s a great question. And the answer is, is you can take on debt. And I would tell you that amongst our clients, it’s ironic, it’s about 50-50. Half of our clients use debt. Here’s the important thing to know is that when you’re buying with a retirement plan, the type of debt or the type of loan that you can use, it’s a little bit different.
Chris Tanner 27:40
It’s called a non-recourse loan. And so in other words, you can’t go out and just use any kind of loan that’s available. You must use what’s known as a non-recourse loan. Non-recourse simply means that whoever the lender is it could be a bank. It could be a private individual, it could be a hard money. lender, their only recourse if you can’t make payments is against the property itself. So they can’t come after you personally to collect the payments, they can’t come after your retirement plan. All they can do is foreclose on the property. And we have a list of non recourse lenders. And you know, we’re always happy to talk to people about how that works. But as long as they’re using a non recourse lender, then yes, they can use a you know, a mortgage to buy the property, okay.
So, typically, I understand that the downpayment for non recourse loan using an IRA is about 30 to 40% down. So let’s say in a scenario where you actually lost your investment, so that they’ll payment Do you now consider it as as a contribution?
Chris Tanner 28:54
Know that down payment is really just part of the investment. So let me use Some numbers to kind of clarify what that looks like. I’m going to use 100,000, because that’s an easy number to work with. And so let’s just say for example, you found a house, it costs 100,000. And you have 30,000 is a down payment. So as the IRA owner, what that means is, is when you bought that house, your IRA owns 30,000 of that house. So if the IRA owner were to buy it, and the next day they were to sell it, they would still have to pay off that loan for 70,000. But the other 30,000, they get back whatever’s left after they pay that off. So it’s not necessarily considered a contribution. It’s just a part of the investment.
So we would look at it like you have 30,000 invested in that property. And if you, let’s say, in a scenario where we lost the house to foreclosure now, we haven’t seen this in 10 years. But let’s just say you know, a recession hit something happen, you don’t want to keep that property, just let it to go into foreclosure, the money that you lost, you don’t have any consequence, right? You don’t have to pay a penalty to for it.
Chris Tanner 29:53
That’s right. So because of the type of loan, the non recourse loan, you’re not personally liable for that loan. So in other words, they cannot come after you or sue you for any additional money. So you would lose the money that you put down. And that would be it. And they cannot come after anything else in your retirement plan. So let’s say you have two houses. And if you fork if they foreclose on one house, they can’t come after the other one. They’re separate investments.
Okay. So let’s just say now that same house, business is booming, you’re making all kinds of returns on your money, who is getting that money and do you have to pay taxes at all for that money. Is there any UBIT tax involved?
Chris Tanner 31:05
Yeah, that’s a great question. And so, if your IRA or your 401k bought the house and is on title, that means profits need to go back into the retirement plan. Now, keep in mind, you always have the ability to take money out. And you can always take what’s known as a distribution if you want to, but when it when you take a distribution, there might be taxes involved.
Chris Tanner 31:30
The exception to that would be a Roth IRA, where if you’ve already paid the taxes, if you wanted to, you could take the money out personally, as long as the IRA has been in place for five years or more, but let’s use your what you had talked about earlier. And let’s say it was 30% down payment, and you have a mortgage there. There is the possibility of a tax called UBIT. And you mentioned that earlier you bet stands for unrelated business, income tax. So what UBIT is, is anytime you have a leveraged piece of real estate, you could be paying some tax on profits above $1,000. Now, what’s interesting is is I don’t want to get into too much accounting, you are able to deduct expenses like you would on a normal rental property. So if you have mortgage interest, taxes, if you happen to have property management, any repairs, things like that, you get to deduct a portion of those expenses to offset the income that you’re making.
Chris Tanner 32:36
And so, the short of it is is it might be possible that there’s UBIT involved, so it would be smart to be aware of Now, let’s talk about the 401k. The IRA is subject to UBIT when there’s a debt leverage property. Interestingly, the 401k when it takes title to a property, Has leverage is not subject to UBIT. and so these discussions we’re having, these are all good reasons why I always recommend that people, give me a call. Let’s talk about your situation, let’s talk about what you want to do. Because if you wanted to buy a rental property, and you didn’t have enough money to buy it, you know, you need a mortgage you need, you’re going to have to take out a loan. I’m going to see if a 401k fits your situation because we want to avoid the UBIT if possible.
okay, so, but then in a situation where you are investing in a syndication, obviously you’re taking on debt, is there a chance that you have to pay UBIT?
Chris Tanner 33:42
there is, yeah. And so that’s a great question. We get that question all the time. real common example to kind of show the difference is, when let’s say you’re buying into a larger deal, maybe it’s an apartment complex, and we’ve got more Multiple investors involved. And so your IRA or your 401k is one of the limited partners, it owns a little piece of the deal. Maybe it owns 2% of the deal. And they, they are using leverage to buy the property, which is very common. Because there’s leverage involved there is the potential for UBIT. And in this situation, it doesn’t matter if you’re using an IRA, or a 401k. UBIT would still apply. And the reason why is the 401k isn’t on title directly. Typically, there’s an LLC, that’s the purchasing entity.
Chris Tanner 34:38
That’s the one taking on the debt. So the IRA and the 401k might possibly both be subject to UBIT. The big thing to keep in mind here is that there are expenses with real estate. So there’s interest, there’s taxes, there’s depreciation, all of those things get taken into account. Before we determine how much income might be taxed, and so I would just tell you as a practical matter, when we see people investing in those types of things, we don’t tend to see a lot of UBIT on a year to year basis. While the investments going on where we would tend to see more UBIT is like an apartment complex, let’s say it was an apartment that they went in, they fixed up. And at some point in the future, they sold the apartment and they made a really nice profit. That tends to be more of a situation where we might then see that UBIT. And what I tell people is, this sounds counterintuitive, and people are afraid of UBIT. But if you are experiencing UBIT, what that means is, is you’ve probably got a really good investment. And what I mean by that is is you have to show some pretty good profit to even experience UBIT. And so it’s better than the alternative where you’re not making much money or you’re losing money. It’s an indication of a good investment is what it honestly is. So I would not be overly fearful of you, but in most situations,
yeah, just just like you explain, right. the more money you make, the more taxes you pay. And you know, if you pay a little bit of UBIT tax, and you get a lot more in return, why not go in and do it?
Chris Tanner 36:21
Yeah, I mean, all I can say is, if I have an investment, I’m using my retirement funds. I wouldn’t mind having some UBIT because I know intuitively that means I’ve as I’ve offset all those expenses, and I’ve had a nice positive gain.
That’s right. That’s right. Now, Chris, out of all the years that you have been doing this, what’s the most creative ways that you have seen someone use the self directed IRA to invest in real estate or 401k? solo 401k?
Chris Tanner 36:51
Yeah, so there are a couple of unique ways that I see people use and so I’m going to start with the 401k because earlier on You asked me what’s the difference between an IRA and a 401k. One of the differences is a 401k allows you to take out what’s known as a personal loan.
Chris Tanner 37:12
And if what a personal loan is, is you’re actually just borrowing from your retirement plan. And because you’re borrowing the money that you’re borrowing is no longer retirement money. And so you can borrow up to $50,000 from your 401k plan, and that money can be used then for for whatever so let me give you an example.
Chris Tanner 37:36
Recently I had some clients who called up and they’re fix and flippers. So they had bought a house and they were able to secure the house and get the financing. The problem was is they didn’t have money for the fix up and they were struggling, finding the money and or the money was very expensive. And so you some of the hard money lenders, you can borrow the money but your You know, it might be two, three points and 12%, you know, the interest can be, you know, punitive. So a creative solution for them was is they were able to buy the house using personal funds and get it under control. Then they established a self directed 401k. And what they did is because they own the house personally, they can’t commingle retirement and personal money, but they borrowed money from their 401k. And the borrowed money was they were able to use for the fix up portion to buy materials and pay contractors and all that. So that was a creative way that they solved the problem.
Chris Tanner 38:40
Another creative way that I see people use their retirement plans, is a lot of times people think I can only work with myself. Like if I find a deal, I have to do the deal. 100% by myself, and that’s not the case. And with retirement plans, that’s not the case either. You can your retirement plan and you can partner it. So as an example, if Vee found a great deal, and he needed a partner, maybe you have 50% of the money. And you come to me, and I have retirement plan, and I have retirement money, I can partner with Vee using my self directed IRA or 401k. And we can do the deal together in a partnership, then we could be 50-50 partners. And so what it does is it allows you more flexibility to get creative, you know, with with that, that plan, so to speak.
So can you partner with yourself?
Chris Tanner 39:42
Great question. And you’re thinking creatively, so the answer is yes. But Timing is everything. So what I mean by that is, you can partner on new deals. You can’t partner on existing deals. So let’s just say as an Example, Vee has a rental property. And right now you have a loan on the rental property and you say, Well, you know what, it’d be nice if I could get rid of that loan. I’d like to take my retirement plan and just pay off that loan. The problem is, is that was an existing deal. You already owned it personally. So you can’t partner with existing deals. But let’s say you find a new deal. And the new deal is that you’re going to be the numbers don’t matter. But you can partner with yourself. So your retirement plan and you can partner together to buy a property.
Chris Tanner 40:41
Here’s the key thing to understand is that you can partner with your retirement plan. But whatever that percentage ownership at whatever that happens to be when you buy the property, it has to be maintained. So here’s the example. Let’s just use 50-50. As an example, let’s say half the money comes from Personally, the other half comes from your retirement plan. Well, what that means is all the income and all the expenses must be shared 50-50. And the reason that the IRS says that is if you think about it, not that people are out to cheat the IRS out of their taxes, but if you want it to what you could do is you could say, well, all the income I’m going to put in my retirement plan. Well, why would I do that? Because that incomes not taxed. And I’m going to put all the expenses on the personal side, because that offsets personal income. The IRS says no, you can’t do that. If half of the property was bought with retirement, that means half the income needs to go back to the retirement. And the same is true of expenses. So if an expense comes up, you want to make sure that that expense is shared 50-50 and as long as people adhere to that percentage, then they absolutely can do it. They can get into trouble if they don’t adhere to that percentage.
Okay, so now in essence scenario, let’s say you trying to partner with your IRA, and do you then create an LLC? And is it a checkbook LLC? Or is that something different?
Chris Tanner 42:15
There’s actually, you actually have some different options for how you do that. And it kind of depends on what works best for you. So you don’t have to create an LLC. You could actually buy a property where you show 50% ownership on title. And so what we typically see is that the client will buy the property, and it might say, you know, Vee Khuu, who 50% owner personally, and Vee Khuu, IRA 50%. Ira is the other 50% owner and their tenants in common. So that’s one way to do it. The other way would be like you’re suggesting is, yeah, you could establish an LLC, and in that LLC, Ira owns 50% of the LLC, and the individual owns the other 50%. It can be done either way. And it would just depend what’s a good fit for somebody? And most of what that decision comes down to is the practical nature is, you know, for making payments and we have repairs, is it easier to just write a check from the LLC? Or do I have separate payments coming one for me personally, one from the IRA. And I would say in some instances where if you know, there’s going to be a lot of check writing or the potential for a lot of payments and expenses, the LLC might just be easier to work with on a day to day basis. But if it’s a property where you’ve got property management, they’re kind of handling a lot of the day to day stuff probably wouldn’t make that much difference. If you had a checkbook set up like with an LLC.
Okay, so now we talk about the most creative the way someone can use IRA to innovate ask, What’s the story? or what have you seen is the biggest screw up that someone did?
Chris Tanner 44:08
That’s a great question, trying to think here because I don’t want to implicate or use names or anything like that. But what I would, what I would share with you is that a lot of the screw ups, so to speak, are very black and white. And what I mean by that is the kind of screw ups that the IRS find are just obvious, you know, where there’s a real clear track of money going from one to the other. But one I’ll give an example of one situation, that it was unfortunate. But there was a gentleman who was buying a property using an IRA and everything looked good and they were literally were sitting at the closing table and at the last second, the company That was providing the loan, said that we need a little bit of additional security, we need you to sign this paper, we need you to guarantee the loan. So you can imagine you’ve put in all this time and effort, you’re sitting at the closing table. This gentleman signed the piece of paper by signing the piece of paper. Basically what he did is he made himself personally liable for the loan, which means it’s no longer non recourse. So it ended up it turned out that this became a prohibited transaction. And at the time, it was an unfortunate deal where, you know, what do you do you say, no, we’re not closing and you know, you could possibly lose earnest money and so that was one that was an unfortunate one. Wow, that’s that’s kind of unintended. That was a tricky one. But you just want to make sure that you’re not personally vouching or providing any kind of guarantee when there’s a loan involved with the IRA.
Right. So the lessons here is that before you do anything with the self-directed IRA or your solo 401k, you should always check with the custodian unless you already know what you’re doing.
Chris Tanner 46:12
Most definitely, and especially when you’re newer, you know, I think what happens is, when people are new to the self-directed IRA or 401k, there’s going to be questions just because it’s new, haven’t done it before. Don’t hesitate to call, you know, get advice, you know, find a good resource that you can lean on.
Chris Tanner 46:33
Chris Tanner 46:34
But that being said, I think a lot of people once they’ve done it for a while they feel a little bit more comfortable. There’s a ton of information on the internet. Not necessarily that it’s all 100% accurate, but there’s pretty good information out there. But you’re right, much easier to ask in the first place, because there’s a lot on the line. If you do make a mistake.
Definitely. Now. I have been doing this for 10-11 years now, I remember back in 2008, I went up to your office and attended like a three hours education sessions with a lawyer up there. And you know, now it, I still have to call I still, whenever something happens, you know, we need to check with your company before we do it. It’s just because we want your blessing before we move forward. You know, it’s not a situation where you do it and ask for mercy later.
Chris Tanner 47:28
That’s exactly right. Yeah, the IRS is not very forgiving that you know, ignorance is not a defense. And so if they find something and they don’t like it, it doesn’t matter if you didn’t know about it, if you didn’t mean to do it, you know, like the gentleman that was standing at the closing table. And he signed a personal guarantee. Well, I can understand you’re at the closing table. You just want to get the deal done. And it didn’t matter. Unfortunately, but I totally agree. It’s not really clear. To you, if this is a transaction that might involve something that’s prohibited, definitely get seek advice. And by the way, if you have to pay to get a little bit of that advice, I would just say as a general rule of thumb, that little bit of payment to get the good advice as far cheaper than losing your IRA plan?
Definitely. And, again, you know, a lot of people think that free advice is not good advice on online. Well, then, Chris and his company, they actually have advice for you. And you can just call and check with him before you commit to anything. Do you does your company charged for consultation upfront?
No, no. And we will definitely try and answer that. That’s a very typical thing where somebody calls before they ever set up their IRA, their self directed plan, and they just want to make sure that it’s something that they can do. And so we get those calls all the time. And what I will tell you is that probably 98% of the calls we can answer pretty quickly. And we know the answer to. And then Vee. There’s some creative folks that that do some creative stuff. And there’s about 2% of them, we actually will take to an attorney and a risk attorney and say, here’s the scenario. What do you think? Because it’s a little above and beyond, you know, I’ve been doing this for a really long time. And every now and then we get stuff. That’s it’s, we don’t know. And so we actually have to go visit with an attorney ourselves. Fortunately, we have several attorneys that we can reach out to, but totally worth doing. Absolutely.
Well. Awesome. Chris, thank you so much for being on the show. You’ve been, you know, dropping some knowledge bomb here with us in the audience, and really appreciate your time. Thank you for being a guest on the show.
Chris Tanner 49:57
Yeah, you’re very, very welcome. And I would just say if anybody is just wanting to get some information, just kind of learn a little bit more, I would just encourage them to visit our website. Our company is called new direction Trust Company. And so the website is the initials of our company. So it’s www.ndtco.com. So it’s like in like Nancy D, like direction t like trust, and then CO dot com. And you once you get there, you’ll be able to, you know, reach out, it’ll give our phone number and more than happy to answer questions that anyone might have.
Definitely. And if you miss that, you can rewind a little bit or just go back to the introduction of this show. And you will have all the information along with how to reach out to Chris for more questions that you may have.
Chris Tanner 50:49
Yeah, well, Vee. Thank you so much. I appreciate the opportunity to come on the show and best of luck with your podcast. I hope it goes well for you.
Will do Thanks, Chris.
Unknown Speaker 50:58
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