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Thursday, 2 Jun 2016 | 9:26 AM ET

It looks so easy on TV. Buy a bargain-basement house, pull up some nasty carpet, re-tile the bathroom, paint away the wall stains and sell it for a hefty profit.

It’s not, however, all those popular shows that are driving the flipping market today. It’s pure and simple prices — and profit. There is a severe lack of good quality, turn-key homes for sale, and that has created a seller’s market across the nation, even for those reselling homes.

After cooling off in 2014, home flipping is on the rise again — its share of all home sales is up 20 percent in the first three months of this year from the previous quarter and up 3 percent from the same period a year ago, according to a new report from RealtyTrac, which defines a flip as a property bought and resold within a 12-month period.

While flipping today is nothing like it was during the housing boom a decade ago, when investors used risky mortgages, it is reaching new peaks in 7 percent of the nation’s metro markets, including Baltimore, Buffalo, New Orleans, San Diego and even pricey Seattle.

Dana Rice, real estate agent and home flipper, at her latest project in Bethesda, Maryland, a very small colonial, within walking distance to shops and Metro.

Diana Olick | CNBC
Dana Rice, real estate agent and home flipper, at her latest project in Bethesda, Maryland, a very small colonial, within walking distance to shops and Metro.

“While responsible home flipping is helpful for a housing market, excessive and irresponsible flipping activity can contribute to a home price pressure cooker that overheats a housing market, and we are starting to see evidence of that pressure cooker environment in a handful of markets,” said Daren Blomquist, senior vice president at RealtyTrac.

That’s because flippers today largely use cash — 71 percent did in the first quarter of this year. Compare that to just 27 percent who used cash at the height of the housing boom. That helps keep most flippers conservative, but it also exacerbates the problems for entry-level homebuyers, who are facing one of the tightest housing markets in history. They simply can’t compete against all-cash buyers.

Usually flippers look for distressed properties either in the foreclosure process or already bank-owned. These are not always listed on public sale sites. There are fewer of those today, so flippers are moving to the mainstream market, creating that new pressure.

“A telltale sign is when flippers are acquiring properties at or close to full market value. Those markets are so competitive that even the off-market properties flippers are looking to buy are not selling at much of a discount — and there may be very few distressed properties available,” said Blomquist.

Examples of these markets include San Antonio, where Blomquist says flippers are actually purchasing at a 7.8 percent premium above estimated full market value, as well as Austin, Texas; Salt Lake City; Naples, Florida; Dallas and San Jose, California.

Despite the premium to buy, flippers are still seeing growing gains in profit. Home flippers realized an average gross profit of more than $58,000 in the first quarter of this year, the highest since the third quarter of 2005, according to RealtyTrac.

Real estate agent Dana Rice and her husband flip houses in the tony D.C. suburb of Bethesda, Maryland. Prices there are well above the national median, and there are few distressed properties. Instead, they target old, small fixer-uppers. Even those command a hefty purchase price up front, but they can also offer big rewards.

“I didn’t want a teardown. There is so much character in this part of Bethesda,” said Rice. “I don’t think that everybody wants a brand new build. There is a hole in the market because not everyone wants to do a renovation. If you put a little bit of effort in, these numbers can be huge.”

Rice purchased her latest project, a very small colonial, within walking distance to shops and Metro, for $680,000. She expects to put half a million dollars into the renovation, adding both square footage and high-end finishings; she is confident that in this competitive market she will see an 18-25 percent return on investment.

“It’s like birthing a baby. … If you’re overpriced, you’re dead in the water.” -Dana Rice, real estate agent and home flipper

“It’s like birthing a baby,” she said, noting that she will wait to list it until she feels the market is just right. “If you’re overpriced, you’re dead in the water.”

The lack of inventory is certainly a double-edged sword for flippers. Their initial investment price can be high, and flippers are often competing against local builders, who may want to tear the house down and put something up that is twice the size. On the other hand, not everyone wants or can afford a huge, new, expensive home, and that gives flippers the edge.

“The key here is that there is particularly a dearth of listed inventory in good condition,” said Blomquist. “That is the inventory flippers are competing against when they sell.”

CFPs: Bad Guys?

October 22, 2006 — Leave a comment


Most people interested in self directed IRA strategies are simply tired of experiencing the mediocrity and volatility of the stock market while hearing the success stories of real estate investors. Because of this, when researching self directed information many people get the impression that real estate = good while stock market = bad. So, financial advisors and CFPs are the bad guys? NO!

A good CFP can be very beneficial to your investment plans. The trick is finding a good CFP. A CFP is to the stock market what a realtor is to real estate. A CFP usually gets paid regardless of how well your stock market related investments perform. A CFP is usually more focused on earning their commission than earning your return.

How do you find a good one?
A good CFP is one whose top priority is your return on investment… because they know your long-term loyalty is to them if they truly look out for YOU first. How do you find out whether they are more focused on YOUR return or THEIR commission? Ask them a simple question: I’m considering converting my IRA to a passive custodian who will let me invest in almost anything I want. This way I can dabble in real estate and private equities, while still allocating a portion of my assets to an investment account with you. What do you think? Now sit back and see what they say.

A good CFP says: How much are you thinking of allocating into real estate and private equities? Who are you going to have helping you with those investments? At this point, a good CFP should primarily show their concern of you involving a real estate expert and/or private equities expert in your plans since they are probably not an expert in those fields themselves. A good CFP is fully aware of and admits that private equities outperform

publicly traded securities and that the worlds wealthiest people hold only 34% of their wealth in publicly traded equities. They are willing to handle only a third of your assets if it creates long term loyalty to them.

A selfish CFP says: That’s risky. You should keep all your money with me. Consider REITS instead. Over the long term, the stock market has risen by 9% per year, while real estate has appreciated less than 9% per year. This is a very good point for a person who plans to buy the whole stock market or the whole real estate market. This response from your CFP really indicates that they know how to invest your money into the stock market, but they don’t know how to invest your money into real estate. A selfish CFP wants to handle ALL of your assets which creates the highest possible commission for them now.

Depending on what your investment objectives are, a CFP or financial advisor can be very valuable. If you are going to involve a CFP in your investments, make the extra effort to find a good one.

by Phoebe Chongchua
Many people are concerned with building wealth so that they can retire comfortably. A decades-old form of investing and creating wealth is gaining in popularity as people search for creative ways to buy real estate.

Investing using your IRA is a complex strategy that I have written about before, but because it is often misunderstood and generates so much interest, it’s well worth further exploration.

The self-directed IRA and IRA LLC (Limited Liability Company) are vehicles to invest in real estate. However, they are not often used because many people are erroneously told by their IRA trustees that you cannot use the account to invest in real estate.

Actually what you have to do is simply find a company that offers the option of using a self-directed IRA to invest in real estate. This can be an extremely beneficial investment tool because IRAs come in two forms: tax-deferred and tax free.

The traditional tax-deferred IRA allows yearly contributions to a tax-deferred account using your pretax dollars. You are not taxed when you deposit into your IRA; you are, of course, taxed when you withdraw the money upon retirement.

The tax-free, Roth IRA, allows yearly contributions of after-tax dollars. You’re not getting a tax advantage in the year of the contribution, but growth of the entire retirement account is tax free as well as the income distributions when you retire.

Many types of IRAs can be converted to self-directed accounts including: Traditional IRAs, Sep IRAs, Roth IRAs, 401(k)s, 403(b)s, Coverdell Education Savings (ESA), Qualified Annuities, Profit Sharing Plans, Money Purchase Plans, Government Eligible Deferred Compensation Plans, and Keoghs.

The creation of a self-directed IRA or IRA LLC enables you to choose what you would like to invest your money in — it can be raw land, single-family homes, condominiums, apartments — to name a few.

“A lot of people want to identify retirement property or identify rental property and they’re going to rent it out until they want to retire and [it’s only] one or two IRAs — then they can do the investment directly,” says Attorney Debra Buchanan of Legal Strategies, P.C. who specializes in asset protection, estate planning and business planning.

Buchanan highly recommends an LLC because it is flexible and you can add and subtract investment partners easily.

“When I set you up as the manager then you have the checkbook [control],” says Buchanan. She adds, “Then every time you are going to invest in a new property you don’t have to have the custodian approve [the transaction].”

“But if somebody is going to invest with one property for a long-term investment then you don’t need to use the LLC strategy,” says Buchanan.

A word of caution — always make certain that the transaction is not prohibited. Setting up an LLC and using an attorney who gives you an opinion letter (stating whether the transaction is legal or prohibited) is valuable protection for you.

Navigating through the process of setting up a self-directed IRA or IRA LLC can seem overwhelming. Using qualified experts to guide you through the process will help keep you out of financial troubles that could cost you your entire investment.


I. Due Diligence:

Many people are unaware that it is perfectly legal for Retirement Plans (e.g. Individual Retirement Plans – IRAs) to purchase non-traditional investments, such as real estate, commercial paper, private companies and promissory notes among others.

The only reason that investors remain unaware of this fact is that most IRA Custodians (by policy but not by law) allow only investments that produce commission for them; generally trades in public stocks and funds.

A brokerage firm subsisting on commissions doesn’t sustain itself if they allow real estate or other longer term private investments. As such, they either refuse to tell their clients of the possibilities of non-traditional investments, or they don’t know about it at all.

Most of our clients elect to use a private Limited Liability Company (LLC) wholly owned by the IRA and managed usually by the client (IRA owner). For most of our clients, the investments are straightforward and we always counsel them on the prohibited transactions Code and other relevant regulations.

The IRS Code does not explain what a plan may invest in; it only outlines what a plan may not invest in. Consequently, our attorneys have put a lot of time into thoroughly understanding the Internal Revenue Codes and Regulations affecting your facilitation of client retirement plans into non-traditional investments.

On February 20, 2004 I met with a representative of the Dept. of Labor, Office of Exemption Determinations, in Washington D.C. Our procedures and understanding of relevant Code sections and IRS/Dept. of Labor regulations were verified as accurate by a Pension Law Specialist with 28 years total service in both the Internal Revenue Service (IRS) and the Department of Labor (DOL).

Our procedures have also been verified by a legal opinion from a Certified Public Accountant who also is licensed as an independent attorney holding a Master of Laws in Taxation (LL.M).

We at IRAAA are confident that our basic structure (e.g. an LLC owned 100% by an IRA which is managed by the IRA owner) meets relevant laws and regulations.

In addition, there are often more complicated situations that arise where the law may be unclear. In these situations we have researched law and regulations, researched published opinions and exemptions and submitted written requests for General information that will obtain a written reply from the appropriate government Agency or Agencies.

Finally, where a client’s specific situation is not clearly addressed in the law, we recommend that we obtain a written Letter ruling or Exemption as required by the appropriate Agency. Our clients can be confident that we have undertaken due diligence to verify its processes, procedures and recommendations. In this Memorandum, the relevant Internal Revenue Code sections or other citations are placed as end notes for easier reading and ultimate verification.

II. Congressional Laws, Agencies and their Relationship:

The substantial legal authority supporting our basic products – discussed in greater detail below – is derived from separate independent sources of legal authority. In an effort to be concise, we do not explicitly address certain general areas of tax treatment.

For example, tax-free rollovers, have been in common practice for in excess of a decade. Where the terms of the trustee-to-trustee transfer are satisfied and the Custodian of the new IRA is an IRS approved Custodian, the tax free nature of the transfer will generally be respected. In addition, the capital contribution to a newly formed LLC is also tax free.

The Internal Revenue Service (IRS) is the Agency that carries out the Internal Revenue Code (IRC), Title 26 of the United States Code. The Agency also creates regulations as a means of carrying out or interpreting various Code sections. These are called the “Code of Federal Regulations” or “CFRs.”

Finally, the Agency issues Letter Rulings, Advisory Opinions and other publications that allow taxpayers a more detailed version of the applicability of Regulations and Code Sections. The IRS has carefully outlined in both Code and regulation what a retirement plan may not do. Thus, the IRS has jurisdiction over whether a particular transaction violates the IRC.

However, under Presidential Reorganization Plan No. 4 of 1978, effective December 31, 1978, the authority of the Secretary of the Treasury (IRS) to issue interpretations regarding section 4975 of the Code (prohibited transactions) has been transferred to the Secretary of Labor (DOL) and the Secretary of the Treasury is bound by the interpretations of the Secretary of Labor pursuant to such authority.

The transactions set forth herein warrant detailed discussion. This memorandum will address the following issues related to our products:

(1) Introduction, (2) Prohibited Transactions, (3) Exemptions, (4) Plan Asset Rule,
(5) Unrelated Business Taxable Income, (6) Conclusion.

1. Introduction:

Individual Retirement Accounts or “IRAs,” are entitled to own various assets subject to certain restrictions. This broad investment selection was made clear in Field Service Advisory 200128011 (April 6, 2001) wherein the Internal Revenue Service (IRS) considered the ability of an IRA owner to invest in a Foreign Sales Corporation (FSC). The quote from the text is in bold:

There is no specific Code provision or regulation prohibiting an IRA from owning the stock of a FSC. The type of investment that may be held in an IRA is limited only with respect to insurance contracts, under section 408(a)(3), and with respect to certain collectibles, under section 408(m)(1).

This is consistent with IRS Private Letter Ruling 8241079 dated February 25, 1982, concluding in favor of a retirement plan investing in an unregistered bond. Finally, investment of IRA funds into a business entity is permitted by interpretive bulletins issued in 1975 and the publication of final regulations following these bulletins that was codified on November 13, 1986. While it is conclusive that an IRA can own an LLC interest or a promissory note, this is only the first step of the legal analysis.

The Internal Revenue Code provides a concise statement of law from which to begin our analysis of some additional matters to be considered in order to conclude in favor of the continued tax-deferred environment of the IRA:

[An] individual retirement account is exempt from taxation . . .unless such account has ceased to be an individual retirement account by reason of paragraph (2) or (3). Notwithstanding the preceding sentence, any such account is subject to the taxes imposed by Section 511 (relating to imposition of tax on unrelated business taxable income of charitable, etc., organizations).
(emphasis mine)

By this section, the IRA is lawfully tax exempt with certain exceptions. The references to IRC § 408(e)(2) and (3) are to, respectively, Prohibited Transactions and Improper Borrowing. Section 511 is otherwise known as Unrelated Business Income Tax (“UBIT”). While the other restrictions set forth in this correspondence cause a deemed distribution (and therefore, taxable income) from the IRA, UBIT subjects only certain income to taxation. Because it is probably the most misunderstood and overly dramatized Code section, the Prohibited Transactions code provides an excellent starting point from which to commence the analysis.

2. Prohibited Transactions

IRC § 4975(c)(1) states that a “prohibited transaction” includes any “direct or indirect”:

· sale or exchange, or leasing, of any property between a plan and a disqualified person;

· lending of money or other extension of credit between a plan and a disqualified person;

· furnishing of goods, services, or facilities between a plan and a disqualified person;

· transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;

· act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest or for his own account; or

· 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.

Thus, as long as IRA LLC Strategy does not involve a “disqualified person,” no “prohibited transaction” can be triggered. This term generally includes fiduciaries, employers, employees, family members and entities in which equity interests in excess of fifty (50%) percent are owned by the IRA owner (or family members). These are detailed below:

· Fiduciary and Disqualified Persons:

The IRA, through the participation of the Registered Trust Company or Self-Directed IRA Custodian, will usually be the sole member of the LLC. The IRA owner will be appointed as the Manager of the LLC by all members, including the IRA (signed by the Custodian). Then, through a specially designed operating agreement, the manager is given authority to choose investments on behalf of the IRA. Any person who exercises authority or control respecting the management or disposition of the underlying assets, and any person who provides investment advice with respect to such assets for a fee (direct or indirect), is a fiduciary of the investing plan. Thus, after initial formation and capitalization of the LLC, the IRA Owner will be a “disqualified person” with respect to the plan or the assets of the plan. However, the issue then becomes whether the IRA owner is a disqualified person prior to formation or capitalization of the LLC.

Prior to the formation and capitalization, the LLC is not in existence. The LLC has no members or membership interests. The LLC has no equity interests outstanding. Before its legal formation, the LLC does not fit within the definition of a “disqualified person” under the Code. Thus, the initial capital contribution to the LLC by the IRA and otherwise disqualified persons, is not a prohibited transaction. This specific issue was addressed in Swanson v. Commissioner, 106 T.C. 76 (1996). The Tax Court, in holding for the Taxpayer, states the following:

We find that it was unreasonable for [the IRS] to maintain that a prohibited transaction occurred when Worldwide’s stock was acquired by IRA #1. The stock acquired in that transaction was newly issued — prior to that point in time, Worldwide had no shares or shareholders. A corporation without shares or shareholders does not fit within the definition of a disqualified person under section 4975(e)(2)(G). It was only after Worldwide issued its stock to IRA #1 that petitioner held a beneficial interest in Worldwide’s stock, thereby causing Worldwide to become a disqualified person under section 4975(e)(2)(G). . . Therefore, [the IRS’] litigation position with respect to this issue was unreasonable as a matter of both law and fact.

The choice of entity (LLC) does not affect this holding. Rather, it is the fact of the newly issued equity interest in the newly formed entity. The IRS is cognizant of the hazards of litigation presented by pursuing this course as a mode of challenge. In holding the IRS’s position “unreasonable,” the Tax Court required the Defendant (the IRS) to pay the taxpayer costs and attorney fees. In conclusion, the direction of funds as an initial capitalization from the new IRA to the LLC does not constitute a disqualified person.

This conclusion was also acknowledged by the IRS in Field Service Advisory (FSA) 200128011 (April 6, 2001). In that FSA, the Service states:

In light of Swanson, we conclude that a prohibited transaction did not occur under section 4975(c)(1)(A) in the original issuance of the stock of FSC A to the IRAs in this case. Similarly, we conclude that payment of dividends by FSC A to the IRAs in this case is not a prohibited transaction under section 4975(c)(1)(D). We further conclude, considering Swanson, that we should not maintain that the ownership of FSC A stock by the IRAs, together with the payment of dividends by FSC A to the IRAs, constitutes a prohibited transaction under section 4975(c)(1)(E).

Even conceding that the LLC Manager and IRA owner is a fiduciary after the formation of the LLC, the basic IRA LLC Strategy does not envision any transaction between the Manager of the LLC and the plan. Therefore, while the disqualified person would be present, the necessary transaction would not. This can change, however, when the manager chooses to take a fee or employ himself in the investment. These must be dealt with on a case by case basis as facts change.

· Employer/Employee

Upon implementation of the IRA LLC Strategy, the IRA involves neither an employer nor employee. The Swanson case, in footnote 14, arrives at the same conclusion.

14/ Furthermore, we find that at the time of the stock issuance, Worldwide was not, within the meaning of sec. 4975(e)(2)(C), an “employer”, any of whose employees were beneficiaries of IRA #1. Although sec. 4975 does not define the term “employer”, we find guidance in sec. 3(5) of the Employee Retirement Income Security Act of 1974 (ERISA), Pub. L. 93-406, 88 Stat. 829, 834. In pertinent part, ERISA sec. 3(5) provides that, for plans such as an IRA, an “’employer’ means any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan * * *.” Because Worldwide did not maintain, sponsor, or directly contribute to IRA #1, we find that Worldwide was not acting as an “employer” in relation to an employee plan, and was not, therefore, a disqualified person under sec. 4975(e)(2)(C). As there is no evidence that Worldwide was an “employee organization,” any of whose members were participants in IRA #1, we also find that Worldwide was not a disqualified person under sec. 4975(e)(2)(D).

· Family Member

Disqualified Person includes a “member of the family” as that term is defined in IRC 4975(e)(6). The family of an individual, or fiduciary, “shall include his spouse, ancestor, lineal descendant, and any spouse of a lineal descendant.” Id. Note that the definition does not include brothers, sisters, aunts, uncles or other non-lineal descendants. Again, the interaction between the plan and ANY disqualified person must be reviewed on a case by case basis. IRAAA always works with its clients to determine exactly what the client intends as an investment and whether any prohibited transaction might result.

· Equity Interest in an Entity.

Section 4975(e)(2) encompasses equity interests in an entity in excess of fifty (50%) percent. Thus, any entity already owned by the IRA owner or fiduciary in which the IRA/LLC might invest must be scrutinized to ensure that a prohibited transaction in sales, services or loans will not occur between the two entities.

3. Exemptions:

As mentioned in the introduction, since 1978 the Secretary of the Department of Labor has had the authority to issue interpretations regarding prohibited transactions and the IRS is bound by those interpretations. Since receiving this authority, the Department of Labor has issued hundreds of exemptions.

The Employee Retirement Income Security Act of 1974 (ERISA) prohibits certain classes of transactions between employee benefit plans and certain persons defined as “parties in interest”. The law does, however, contain a number of statutory exemptions from the prohibited transaction rules.
In addition, ERISA gives the Department of Labor authority to grant administrative exemptions from the prohibited transaction provisions if the Department first finds that the exemption is:

· administratively feasible;

· in the interest of the plan and of its participants and beneficiaries; and

· protective of the rights of participants and

· beneficiaries of the plan.

Most of the transactions prohibited by ERISA are likewise prohibited under the Internal Revenue Code. The Code also contains exemptive authority similar to that found under ERISA.

The Department of Labor has gained 20 years of experience with the processing of large numbers of applications for exemptions from ERISA’s prohibited transaction provisions. Through that experience with a wide variety of transactions, a number of transactions have emerged which have similar characteristics.

The ERISA law contains several specific exemptions whereby plans may engage in transactions otherwise prohibited by law. In order to use these statutory exemptions, parties must meet the conditions of the applicable exemption.

ERISA generally provides statutory exemptions for, among other things, loans to participants, the provision of services necessary for the operation of a plan for no more than reasonable compensation, loans to employee stock ownership plans, and deposits in certain financial institutions regulated by other State or federal agencies.

Under ERISA, the Department may grant administrative exemptions to an individual or a class of individuals allowing them to engage in a variety of transactions involving employee benefit plans.

Class exemptions are administrative “blanket” exemptions which permit persons to engage in similar transactions with plans in accordance with the conditions of the class exemption without asking for an individual exemption. For example, class exemptions have been granted covering:

* Transfers of individual life insurance contracts between plans and their participants (PTE’s 92-5 and 92-6)
* Sales of customer notes to plans by their sponsoring employers (PTE 85-68)
* Interest-free loans made to plans by their sponsoring employers (PTE 80-26)

Individual exemption requests must be drafted by certain standards and contain specific information to be considered. The attorneys at Legal Strategies, PC can draft exemption requests for those clients who propose an otherwise prohibited transaction, but the transaction meets the criteria for exemption. Where two or more individual exemptions are granted by the Dept. of Labor, a similar fact pattern can achieve an exemption in an expedited fashion. The time line for a formal opinion depends upon the workload of the Department, but they have indicated to IRAAA that it can take as long as six months, or as little as just a few weeks.

4. Plan Asset Rule:

Investment of IRA funds into a business entity is clearly permitted. However, the assets of the LLC are assets of the IRA where the plan owns 100% of the LLC. This is significant because where the LLC assets are considered “plan assets” any transaction between the LLC and a disqualified person is potentially subject to the prohibited transactions Code. This could arise in transactions such as loans between the IRA/LLC and the plan owner, employee or management payments to the plan owner or a lineal descendant, etc. However, the assets of an LLC are not necessary considered “plan assets.” Under the plan asset rule:

…when a plan invests in a non-publicly traded entity, the assets of the plan include BOTH the equity interest and an undivided interest in each of the underlying assets of the entity, unless:

(1) The entity is an operating company, or

(2) Equity participation in the entity by benefit plan investors is not

Under the Code, when a plan owns less than 25% of an entity, equity participation is not “significant” so the assets of the entity are not assets of the plan. The issue then, is whether entity assets are considered “assets of the plan” when 25% to less than 100% of the entity is owned by the plan. This is what we refer to as the “gray area” and can only be definitively answered based upon the facts of each case.

Because the law is not completely clear, IRAAA makes the safe assumption that when a plan owns 25%-99% of an entity the IRA involvement may be considered “significant.” Therefore, we acknowledge that when a plan owns 25% to 99% of an LLC, the assets of the LLC should be considered assets of the IRA for a prohibited transaction analysis, unless the LLC is considered an “operating company.”

Thus, the question becomes, “Is the entity an “operating company,” under 29 CFR 2510.3-101?
Most of our clients who have IRAs owning 25% to 99% of a private company might like to interact with the company such that it might appear to be a prohibited transaction. This includes personal guarantees on loans to the LLC, loans made by a disqualified person to or from the LLC, or other personal benefit from the transaction. This seems possible only if:

· The company fits the definition of “operating company.” and

· The loan guarantee is made to the company loaning to the LLC, not to the plan or plan assets.

In other words, if a personal guarantee of a mortgage on property purchased by an LLC (partially owned by an IRA 25-99%) is required, we would want to be certain that our clients fit within the definition of an “operating company.” Further, we ensure that no other prohibited transactions are taking place in the set up or operation of the entity and its investments. This is what IRAAA provides to its clients in continuing legal support throughout the process. We request that our clients ask questions and provide details of their investment intentions in writing (e.g. E-mail) so that there is no misunderstanding.

5. Unrelated Business Income Tax:

As previously provided above, IRC § 408(e)(1) states:

[An] individual retirement account is exempt from taxation . . .unless such account has ceased to be an individual retirement account by reason of paragraph (2) or (3). Notwithstanding the preceding sentence, any such account is subject to the taxes imposed by Section 511 (relating to imposition of tax on unrelated business taxable income of charitable, etc., organizations). [Italics added].

To the extent that there is unrelated business taxable income (UBIT) earned by the IRA, it will be currently reportable and taxable by the plan participant. For example, the interest earned by a promissory note is expressly excluded from the definition of UBIT.

There shall be excluded [from the definition of unrelated business taxable income] all dividends, interest, payments with respect to securities loans (as defined in section 512(a)(5)), amounts received or accrued as consideration for entering into agreements to make loans, and annuities, and all deductions directly connected with such income.

There are certain factual patterns in which UBIT might apply. We advise our clients on a case by case basis whether the UBIT might apply to the particular investment.

8. Conclusion:

IRAAA is a leader in the area of self-directed pension plans. We can and do help our clients to accelerate their tax free or tax deferred pension plan growth by knowing and understanding the complex laws and regulations affecting pension possibilities. This Memorandum is designed not to teach the reader how to make non-traditional investments, the legal minefield is far too immense to attempt this without years of study. Rather, by this we hope to instill confidence in our clients and associates by explaining the underlying platform of IRAAA products, as supported by DOL and IRS Codes and regulations.

The LL.M. Program in Taxation is designed for those interested in studying complex course work in taxation and tax-related issues. Admission to the LL.M. degree program requires an LL.B. or J.D. degree from a law school approved by the American Bar Association and the Association of American Law Schools. Law degrees from schools in foreign countries do not meet these minimum requirements. To earn the LL.M. degree in taxation, students need to satisfactorily complete 24 credit hours of study in residence. The following courses are required for the LL.M. degree in taxation if they were not previously taken in law school: Estate and Gift Tax Planning, Federal Income Taxation, Partnership Taxation, and Corporate Taxation. No credit is given for any course earning a grade of 75 or below.

Codified in 26 USC § 408(d)(3). (Also known as IRC Section 408).

26 USC § 721.

Governed by IRC Section 408.

IRS FSA 200128011.


See ERISA IB 75-2 and its codification: 29 CFR 2509.75-2.

IRC 408(e)(1).

Defined in IRC 4975(e)(2).

26 USC § 4975(e)(3)(A).

26 USC § 4975(e)(2).

Id. at 25.

29 CFR 2509.75-2

29 CFR 2510.3-101 (h) (3) See Also 29 CFR 2510.3-101(a)(2).

Department of Labor Opinion Letter 90-23. See Also H.R. Rep 93-1280 , 93rd Cong., 2d Session, 308 (1974) and 26 USC § 4975(c)(1)(B).

29 CFR 2509.75-2(a).

29 CFR 2510.3-101(a)(2).

29 CFR 2510.3-101(f).

Id. An “operating company” is defined as an entity that is primarily engaged, directly or through a majority owned subsidiary in the production or sale of a product or service other than the investment of capital (Including venture capital companies and real estate operating companies). A real estate operating company is defined by 29 CFR 2510.3-101(e). An entity is a “real estate operating company” if:
1. On the initial valuation date, at least 50% of its assets are invested in real estate which is managed or developed and with respect to which such entity has the right to substantially participate directly in the management or development activities.
2. During the 12 month period beginning with the initial valuation date, such entity in the ordinary course of its business is engaged directly in real estate management or development activities.

IRC § 512(b)(1).

See also, Treasury Regulation 1.512(b)-1(a)(1).

The Joint Venture deal is quite simple.

The money partner puts up all the money, in the form of a one-time non returnable capital contribution.

They qualify for the loan.

I do all of the work.

  • I find the property,
  • make the written offers,
  • negotiate the transaction,
  • re-market the property,
  • handle collections,
  • repairs and
  • property management.
  • In essence … everything.

When the month is over, the expenses are paid and we split the profits or losses 50-50.

  • If the investor has out of pocket costs to cover the mortgage, he is reimbursed from future profits.
  • If Southwestern Funding Group, Inc. (my company) is out of pocket for expenses, we are reimbursed from future profits.
  • We are the caretakers of the system.
  • It’s clean and simple …
  • and it works time-after-time.

That’s the story of leverage and investors.

Please remember to corne back and review this section often. The principle of Leverage is critical to your success. You must master it.

by Tony Reaves

 In real estate investing the biggest thing that troubles most people is how to find the deal, and determine if it’s a deal or not.  Then its where do I get the money to fund the deal.

Most of us have heard the saying, “if you get a deal, the money will come.”

For the most part that is true, but if you have a deal and do not have the funding for it, you can lose a great opportunity.  In my opinion it would be better to bring in a partner that can help you get the deal done as opposed to losing everything.

With that said, in May’s Special presentation, I’m going to show you how to raise private money.  I have taken what others have done and set up my own system for raising money to fund the deals.

Here is your first lesson: 

Line up private money first, because once you need it, it may be hard to find. 

If your advertisement reads “We buy houses CASH.  Sell your house in 9 days or less,” make sure you can back that up by securing the funding first.

One of the best ways I know of raising money is by using a script.

So, do yourself a huge favor and call five people you know and say the following:

“I came across a great opportunity and was wondering if you know someone that might be interested in earning 12 to 15 percent on their money? If they invest, I will pay you 1 to 2 percent on the amount invested”.

Be ready to discuss the results of your five calls at the meeting. 

Rule of thumb: once you get the money use it and pay your investors back.  Try to pay out better, and sooner than expected.

This way they will have confidence in you and will most likely do business with you again or refer you to others.

In a private money presentation, you should know:

  • How to present the deal to the private lender
  • How to structure the documentation
  • What to do when someone needs their money out early.


Note from Brian -The article below appeared re: SDIRAs.It is clear the PRESS knows little about being innovative with SDIRAs and IRA-LLCs.Learn how to do it and make some tax-favored returns!All the best,Brian——————————————————————————————–

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var sWinHTML = window.opener.sWinHTML; document.write(sWinHTML); Sweat equity in IRA real estate can be no-no
By Lynn O’Shaughnessy
Tuesday, October 17, 2006
A year ago, a popular financial magazine featured a story about an enterprising fellow who purchased a fixer-upper and then sold the house for a quick profit after remodeling it. The story would have been unremarkable except for a couple of important details. The money for this real estate deal was plucked from the man’s Individual Retirement Account. While few people realize it, using retirement cash to buy a house, a condo, a parking lot or even a Laundromat is completely legitimate. But what even fewer investors seem to realize is that investing in real estate inside an IRA can transform the retirement account into a Molotov cocktail. I don’t know what happened to the ambitious investor, but he may have spent face time with an IRS auditor. What possible transgressions could this guy have committed? Well, if our fix-it man had, for example, plastered a wall, nailed a few boards or replaced dingy linoleum tile in the kitchen himself, he potentially would owe the IRS a harrowing amount of taxes and penalties. I bring this anecdote up because the number of people who are toying with the idea of investing in real estate within their IRA has been growing. Experts in the field suggest that roughly 2 percent of the $3.6 trillion to $3.8 trillion IRA market is now in real estate and other nontraditional investments. Real estate became an irresistible alternative to some investors as their exasperation with the markets, beginning with the tech implosion, grew more and more unbearable. The IRS has indirectly encouraged this growth by allowing taxpayers to throw their retirement cash into just about anything inside their so-called self-directed IRAs. It only prohibits IRA investments in S corporation stock, life insurance, loans to the IRA owner, and collectibles, such as artwork, antique furniture and stamps. That leaves a lot of creative wiggle room for people who are disenchanted with stocks, bonds, mutual funds and certificates of deposit. Intrepid investors have gambled their retirement assets on overseas real estate, trust deeds and private equity, as well as more oddball investments, such as fishing rights in Alaska, boat slips, earth-moving equipment, a locomotive and tree farms. While owning an apple orchard inside your IRA might sound like fun, following the IRS’s playbook could be more exhausting than pruning every last tree. One formidable roadblock that adventuresome investors can smack into is what’s called a prohibited transaction, which the IRS considers to be any improper use of an IRA by the owner or other so-called disqualified persons, which include spouses, parents and children. You couldn’t, for instance, buy a vacation home for your IRA and use it for yourself. Even if you only stayed in the residence a few days out of the year, you would be courting danger with the IRS. Your kids or your parents also couldn’t hang out at the house, even if you charged them rent. The penalty for stumbling into a prohibited transaction conjures up Old Testament retributions. Even if a mistake is unintentional, the IRA will be considered dead, dating back to the first day of the year the mistake was committed. The IRA must be dissolved, and taxes, as well a 10 percent early withdrawal penalty, if applicable, will be owed. Here’s another rule that could elicit groans. You can’t boost your property’s value by rolling up your sleeves and fetching your toolbox. This is what the home remodeler appeared to have done. While you can make yearly contributions to an IRA, you can’t contribute sweat equity to the property. That means you can’t personally plant petunias, replace a broken window or add a deck. What the IRS will permit an investor to do is make managerial decisions. For instance, you could pick a tenant for your property and decide what rent to charge. If your tenant calls to complain about a stopped-up drain, you can decide whom to call to fix it. Another threat that nontraditional IRA investors face is commingling outside cash with their retirement account. Suppose, for instance, that you own a condo in your IRA and your tenant’s monthly rent check is late. Because of this, you won’t have enough cash inside your IRA to cover the property tax. If you solve the cash flow problem by paying the property tax out of your checking account, you’d better hope the IRS doesn’t notice. It could penalize you for making an excessive contribution to your IRA. With so many ways to mess up, you have to wonder why many investors with self-directed IRAs haven’t been maimed by the IRS buzz saw. But professionals I’ve talked to say the IRS hasn’t been vigilant – at least not yet. “At this point, the IRS is not looking,” says Patrick W. Rice, the author of “IRA Wealth, Revolutionary IRA Strategies for Real Estate Investment.” “At some point, though, the IRS will look hard, and if you’re doing things improperly, you will get caught.” Lynn O’Shaughnessy is the author of “The Retirement Bible” and “The Investing Bible.” She can be reached at Visit Copley News Service at

Lynn O’Shaughnessy is the author of Retirement Bible.

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Private mortgages

Originate new private mortgages or deeds of trust as an investment

We recommend you work with a reputable mortgage broker with experience in private mortgages and loans. If you don’t know one, look on our web site for mortgage brokers that offer private mortgages and see if they need any more investors. Note that we have not checked out any advertiser.

Many of these mortgages will be for real estate investors who need quick, short term money to buy a house at a bargain price, fix it up and then resell it for a profit. A process known as “flipping”.

The pages that follow below are a guide to how to protect yourself when investing in private mortgages. A lot of the paperwork will be handled for you by a competent mortgage broker. But we believe that you should understand how the process works.

Find mortgage brokers on our web site now.

Learn how to manage your private mortgage

Free step by step lessons on how collect your monthly payments. Get a credit report on your borrowers. Accounting for money received with free Excel ® spreadsheet or manually. Create payment coupons on-line. What to do if the borrower stops paying. How to account for your end of year taxes.  When you should foreclose the mortgage. What to expect from your foreclosure attorney.

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From , our favorite Note and Seller Financing Site!

Sell real estate quickly with owner financing (seller financing)

There are several reasons to sell your real estate with seller financing.

bullet A quicker sale
bullet A higher price
bullet Lowered loan costs for the buyer
bullet The mortgage you receive should be a good investment
bullet Deferred taxes if an investment property

[Home] [Introduction] [Improving saleability] [Creating a safe mortgage] [Market your home] [Advertising your home] [A prospect phones] [Hold an Open House] [Real estate contract] [Creating a saleable mortgage note] [Buyers credit] [Committment to pay] [Which is the better deal?] [Mortgage credit ratings] [Owner occupied] [Non owner occupied] [Commercial] [Calculate the payment] [Second mortgages] [Borrowers with bad credit] [Documents to use] [Create your documents] [Minimum documents needed] [Steps before closing] [Seller financing imputed interest] [Unusual mortgage clauses when selling a home] [Wrap around mortgages] [Escrow real estate taxes hazard insurance] [Real estate installment sales] [Mortgage unusual clauses you should have] [IRS publication 523 2003 selling your home]

Before you can offer owner financing, you probably need to own the property free and clear of mortgages. Some mortgages can be assumed by a buyer, but most cannot. If you do not own the property free and clear you can use a form of seller financing known as a lease option. This enables you to get someone into the house quickly but you still hold title and the due on sale clause is not triggered. There is information on lease options on this site.

Remember that if someone assumes your mortgage, you are usually still liable on it if they don’t pay. (Unless you get a release from the lender called ‘novation’).

Be wary of letting someone buy your property ‘subject to’ the existing mortgage. If they do this, they are not guaranteeing that they will make the payments And if they don’t it could come back to haunt you years later.

The first question is, “What is your home worth”? You can order an appraisal from a local licensed appraiser for about $300 or get a computer generated valuation on line.

Follow the course below or go directly to a page of interest.

[Home] [Introduction] [Improving saleability] [Creating a safe mortgage] [Market your home] [Advertising your home] [A prospect phones] [Hold an Open House] [Real estate contract] [Creating a saleable mortgage note] [Buyers credit] [Committment to pay] [Which is the better deal?] [Mortgage credit ratings] [Owner occupied] [Non owner occupied] [Commercial] [Calculate the payment] [Second mortgages] [Borrowers with bad credit] [Documents to use] [Create your documents] [Minimum documents needed] [Steps before closing] [Seller financing imputed interest] [Unusual mortgage clauses when selling a home] [Wrap around mortgages] [Escrow real estate taxes hazard insurance] [Real estate installment sales] [Mortgage unusual clauses you should have] [IRS publication 523 2003 selling your home]