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 Post subject: Cash + Real Estate + Roth IRA = Infinite Tax Free Retirement
PostPosted: Mon Jul 11, 2011 5:03 pm 

Joined: Mon Jul 11, 2011 4:11 pm
Posts: 19
There's a way to use a Roth IRA, combined with Real Estate and your cash to safely and easily build wealth tax-free that many people don't know about.

Many would argue that you can only put a small amount into a retirement account such as a Roth IRA, 401k, etc. While this is true with cash contributions, using Real Estate you can grow it infinitely tax-free. It may work with other investment strategies but I'm in Real Estate so that's what I know.

I'm going to use the example of someone who has $30,000 in cash to invest.

First take enough cash so that after taxes, you have $1,000 in your Roth IRA (or even $100). Once you have a Roth with money in it, you then can invest your $1,000 and your remaining $29,000 cash in a single real estate transaction. It doesn't matter what the return on investment is, but let's just use 10% because that's what people pay in hard money loans.

In a year, your $1,000 would be owed $1,100 and your $29,000 would be worth $31,900.

Now the secret question is: What if your IRA and you had a partnership in which you agreed to pay the IRA a greater profit on this transaction? Couldn't you opt to give your IRA MORE THAN $100 profit? SURE YOU COULD!

If you don't need the all money in your bank account and you want the increase to be tax free then why not pay the IRA $10,000 profit instead? If you did, it would be a TAX FREE INCREASE. That's right, you NEVER have to pay taxes on it--EVER. You also got around the max. contribution restriction at the same time.

It's a great, safe, and lucrative strategy done easily with Real Estate, or loaning money on real estate hands-off that not many people know about.

If you have concerns about this strategy then please share them. I have asked a couple of financial planners and they have confirmed this strategy, but I have never done it myself.

Please share your thoughts/ideas regarding this idea and PLEASE don't thread-defecate about how safe/unsafe Real Estate is as an investment. I do foreclosure flipping and it's VERY safe--I've never lost money on it. This post is here to get your thoughts on this investment strategy to grow your Roth IRA. Thanks!

-Neil


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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Mon Jul 11, 2011 5:42 pm 

Joined: Mon Feb 07, 2011 6:33 pm
Posts: 1128
Location: Illinois
I asked this after your last post, but here again.

How do you get around the "prohibited transactions"/"no self dealing" rules?


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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Mon Jul 11, 2011 6:07 pm 

Joined: Mon Jul 11, 2011 4:11 pm
Posts: 19
bpgui wrote:
I asked this after your last post, but here again.

How do you get around the "prohibited transactions"/"no self dealing" rules?


Prohibited Transactions: (http://www.irs.gov/publications/p590/index.html. In short, you cannot invest your IRA money in collectibles, antiques, coins, stamps, life insurance contracts, metals, gems and alcoholic beverages. You are also not allowed to buy, sell or exchange property or investments to a disqualified person, such as a spouse, child, father, mother or others who are closely related to you (refer to Publication 590).

Get around it? invest in someone else's property, not your own.

Self-Dealing: what would you consider to be self-dealing in this example?


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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Mon Jul 11, 2011 6:36 pm 

Joined: Mon Feb 07, 2011 6:33 pm
Posts: 1128
Location: Illinois
RealInvesting wrote:
Self-Dealing: what would you consider to be self-dealing in this example?

Your agreement, or partnership as you put it, with your IRA to let it receive all the income from the mutual investment. In substance, it is loaning money to your own IRA.


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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Mon Jul 11, 2011 6:42 pm 

Joined: Mon Feb 07, 2011 6:33 pm
Posts: 1128
Location: Illinois
RealInvesting wrote:
Prohibited Transactions: (http://www.irs.gov/publications/p590/index.html. In short, you cannot invest your IRA money in collectibles, antiques, coins, stamps, life insurance contracts, metals, gems and alcoholic beverages. You are also not allowed to buy, sell or exchange property or investments to a disqualified person, such as a spouse, child, father, mother or others who are closely related to you (refer to Publication 590).

Pub 590 only provides a general overview of prohibited transactions. The regs go a lot deeper.


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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Mon Jul 11, 2011 7:09 pm 

Joined: Mon Feb 07, 2011 6:33 pm
Posts: 1128
Location: Illinois
26 U.S.C. Sec. 4975(c)
Quote:
(c) Prohibited transaction
(1) General rule
For purposes of this section, the term “prohibited transaction” means any direct or indirect—
(A) sale or exchange, or leasing, of any property between a plan and a disqualified person;
(B) lending of money or other extension of credit between a plan and a disqualified person;
(C) furnishing of goods, services, or facilities between a plan and a disqualified person;
(D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;
(E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interests or for his own account; or
(F) receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.

That's just the code section, digging through the regs is a PITA when I'm not at work with my nifty tools.

Notice the bolded portion (subsection (c)(1)(B)). The IRS is the king of making the argument "substance over form", and I have no doubt they would make that argument and win. My guess is the regs will have an example of a prohibited transaction very similar to what you are proposing. If I get a bit of free time tomorrow (and think about it), I'll look.

Edit: You strategy might also be prohibited by subsection (c)(1)(E).


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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Mon Jul 11, 2011 7:30 pm 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5285
It's a shame people don't read the tax code before flapping their fingers about wild schemes.

The sad part is that if Neil does this long enough he will get some suckers to go along with it and some of them could end up in jail or with huge fines and penalties.


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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Mon Jul 11, 2011 7:51 pm 

Joined: Mon Feb 07, 2011 6:33 pm
Posts: 1128
Location: Illinois
DoingHomework wrote:
It's a shame people don't read the tax code before flapping their fingers about wild schemes.

The sad part is that if Neil does this long enough he will get some suckers to go along with it and some of them could end up in jail or with huge fines and penalties.

And the penalties are severe:
Quote:
(a) Initial taxes on disqualified person
There is hereby imposed a tax on each prohibited transaction. The rate of tax shall be equal to 15 percent of the amount involved with respect to the prohibited transaction for each year (or part thereof) in the taxable period. The tax imposed by this subsection shall be paid by any disqualified person who participates in the prohibited transaction (other than a fiduciary acting only as such).
(b) Additional taxes on disqualified person
In any case in which an initial tax is imposed by subsection (a) on a prohibited transaction and the transaction is not corrected within the taxable period, there is hereby imposed a tax equal to 100 percent of the amount involved. The tax imposed by this subsection shall be paid by any disqualified person who participated in the prohibited transaction (other than a fiduciary acting only as such).

So you could get a total penalty of 115%, and you are almost guaranteed to get that whole penalty, as the IRS is not likely to audit you until AFTER the taxable period has ended, meaning you cannot correct it to avoid the 100% added penalty, unless you self report it.


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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Tue Jul 12, 2011 8:22 am 

Joined: Mon Jul 11, 2011 4:11 pm
Posts: 19
OK, since I'm not a tax person, or a financial advisor, this is all new to me. Thanks for the input.

Now, what if we changed the scenario a bit? Take out the bank account money completely.

Is there a maximum someone can earn on their Roth IRA as a return on their investment?

For instance, what if they put in $1,000 as a loan, and earn 2,000% interest in 30 days. Are there rules against making so much? The person they're loaning the money to would not be remotely related to them.

Like I said, I'm just learning so than you for all your input so far.


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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Tue Jul 12, 2011 8:40 am 

Joined: Mon Feb 07, 2011 6:33 pm
Posts: 1128
Location: Illinois
RealInvesting wrote:
OK, since I'm not a tax person, or a financial advisor, this is all new to me. Thanks for the input.

Now, what if we changed the scenario a bit? Take out the bank account money completely.

Is there a maximum someone can earn on their Roth IRA as a return on their investment?

For instance, what if they put in $1,000 as a loan, and earn 2,000% interest in 30 days. Are there rules against making so much? The person they're loaning the money to would not be remotely related to them.

Like I said, I'm just learning so than you for all your input so far.
I am a tax professional. Specifically an attorney that does a large amount of tax work.

In such a case, the lack of a blood relationship is immaterial. There would be a relationship sufficient to make that third party a disqualified persond. By nature of you having an agreement with that third party to pay a large amount interest to your IRA (and you are funding those interest payments either directly or indirectly) and you are directing those payments. The IRS loves to bypass the strawman middleman and look at the actual substance of what is ocurring.


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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Tue Jul 12, 2011 8:51 am 

Joined: Mon Feb 07, 2011 6:33 pm
Posts: 1128
Location: Illinois
In regard to maximum interest that can be paid, many states have usuary laws that determine the maximum interest rates that can be charged on loans. The feds may have a similar law. I haven't worked with thes laws enough to know the rates or whether they would apply in this situation.

I can say, however, that the IRS would use an extremely high interest rate as evidence that the transaction was not an "arm's lenght" transaction which would go towards showing that it is a prohibited transaction.

Just as an aside, the IRS does set minimum interest rates. You can charge less but the difference between what you should have received and what you actually receive is considered a gift, and is subject to gift tax and GST tax if applicable. Usually in the context of loans to related parties.

I assume they would similarly argue that extremely high interest was a gift as well.


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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Tue Jul 12, 2011 9:12 am 

Joined: Mon Jul 11, 2011 4:11 pm
Posts: 19
I thank you for your time and you are very knowledgeable in this subject so I appreciate it. However, i know that extremely high interest rates are paid all the time in this business--in fact they're the "norm" in what I do. I wonder how they're getting around these rules you are referring to.

What if it weren't a "loan?" but it was a partnership? is there any way to pay an IRA 2-3 times the amount invested without issues?

I know that if you take out the IRA, and the person has a beneficial interest in the deal, it's no longer a loan and they can make as much as they want. Could an IRA be on the Deed and make a substantial profit?


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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Tue Jul 12, 2011 3:44 pm 

Joined: Mon Feb 07, 2011 6:33 pm
Posts: 1128
Location: Illinois
RealInvesting wrote:
I thank you for your time and you are very knowledgeable in this subject so I appreciate it. However, i know that extremely high interest rates are paid all the time in this business--in fact they're the "norm" in what I do. I wonder how they're getting around these rules you are referring to.
I guess that depends on how high the rates are in comparison to the usury laws and/or whether they apply to the specific circumstance. I'm not an expert in them by any stretch.

Quote:
What if it weren't a "loan?" but it was a partnership? is there any way to pay an IRA 2-3 times the amount invested without issues?
The partnership is where you get into trouble. You can't combine your non-IRA investments with IRA investments and agree to have all or more of the income paid to the IRA. No matter how many strawmen you put in between.

Additionally, If a legitimate "arm's length" transaction really did pay 200-300% interest or whatever rate, there wouldn't likely be a problem. The thing that most likely gets you into trouble here is that it isn't an arm's length transaction and you are using non-IRA money as part of the investment (either directly or indirectly). You, the IRA owner, are determining how much interest to pay to the IRA (or at a minimum have control over the person who does make that determination) and are using your own funds to pay that interest.

Quote:
I know that if you take out the IRA, and the person has a beneficial interest in the deal, it's no longer a loan and they can make as much as they want. Could an IRA be on the Deed and make a substantial profit?
An IRA can buy real estate (again provided it isn't otherwise a prohibited transaction due to some other reason like you personally owing an interest in it), and if that real estate skyrockets in value, that is fine. You CANNOT, however, purchase real estate in the IRA where you or another disqualified person owns an interest or controls an interest in the same real estate (or purchase it from yourself or a DQ'd person for that matter). i.e. your non-IRA funds cannot be used to invest in the same real estate.

I would also question the purchase of real estate in an IRA from a simply efficiency standpoint. If it is in the IRA, you don't get to take advantage of any of the tax deductions for depreciation, property taxes, etc. You don't recognized gain on the income, but often the deductions can outweigh the income and generate a useful tax loss for your income tax return, but I guess that is another topic.


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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Tue Jul 12, 2011 8:19 pm 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5285
I have started wondering why the focus on IRA money.

As I understand your business, borrowing cash from investors to buy houses, fixing them up, then selling them and paying high interest to the investors, could be entirely legal. Just keep away from the IRA money and make sure you jump through the right hoops with your state.

Why are you so hung up on the IRA part?


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 Post subject: Re: Cash + Real Estate + Roth IRA = Infinite Tax Free Retire
PostPosted: Tue Jul 12, 2011 8:22 pm 
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Joined: Wed Sep 23, 2009 9:01 am
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bpgui wrote:
I am a tax professional. Specifically an attorney that does a large amount of tax work.


Can you help me pay less tax? Please? Maybe you have a magic structure you can sell me with all sorts or pretty woven off shore trusts and such?

Lol, just kidding


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