Self-Directed Retirement Accounts – Combining Personal and Plan Money via IRA

David Moore: Hello, Dave and Tom Moore, IRA Advantage, and I get to talk with my brother today, which is great. So, we’ve been covering a variety of topics. I think we’re going to wrap up today just by talking about another trend that’s sort of coming to be and I guess what I’ll do is just ask you, is it possible to combine personal money and plan money, IRA 401K funds, into a common investment?

Tom Moore: Yeah, it certainly is. And it’s fairly common that we get the question. People actually putting that into practice, maybe not quite as common because there are some restrictions. But if somebody comes in and they’ve got some cash in their IRA and they want to go out and buy a piece of rental property, but there’s not enough cash there to buy that property outright, they’ve got a couple of different options. They can either get some non-recourse financing for it, or if they wanted to, if they’ve got personal funds, they could throw that into the mix and have that property purchased either as tenant in common, both the individual and their IRA LLC, buy it as tenants in common, or they could form another partnership that they are a member of along with the IRA LLC and that partnership goes out and buys the property.

David Moore: Interesting.

Tom Moore: Only issue there is that it’s okay for them to invest into that asset as long as they do so at the same time, but they really need to put enough money in it to not only buy it, but to cover expenses because getting more money into that through individual sources or the IRA creates some issues there and it’s not something that you can put more money into the asset from either one of those sources.

David Moore: So, if we use Tenancy in Common, it probably gives you a couple of different advantages because you wouldn’t have that hindrance. So, the problem with qualified and personal funds into that single LLC, you can fund it initially, but the problem occurs after that funding if you needed to add more, right? Is that…

Tom Moore: Yeah, because then you’re really having to either have that entity go out and get financing to borrow funds if you need more money or bring in another investor.

David Moore: Yeah. Yeah. Okay. So, and I guess if we’re doing it as common members of an LLC, what would happen on disposition of that property if you’ve got… And I would, I mean obviously you could use your Checkbook IRA LLC to own everything or maybe to segregate it a little bit, you could create a different LLC. So, your Checkbook IRA might have just your money and then you’ve got another LLC to own the asset and personal and plan money and the Checkbook IRA is a member and then you as a member of that, that might be a better strategy, especially if you think maybe you want to take an in-kind distribution or something at some point.

Tom Moore: Yeah. Yeah. Because if you do that, you’ve got your IRA and your individual self in there as a partner, and you asked about dispositions. So, if you’ve got a situation where you want to sell that piece of property and it’s owned under this partnership entity, then upon sale of that, the only way for you to defer your taxes as an individual, that partnership’s going to have to go out and do a 1031 exchange, even though it’s got partial qualified money, which normally does not have to do an exchange.

David Moore: So yes, he said that the tax… Could be taxed on that thing. Another reason they could trigger, even with an IRA, you could have tax on an investment that had leverage, right?

Tom Moore: Correct. Yep. So, if you’ve got a leveraged property and it’s purchased with both qualified and non-qualified borrowed funds, then upon sale of that, you end up with Unrelated Business Income Tax or UBIT taxes on that portion that is attributable to the borrowed funds, the non-qualified funds. If you have that Tenancy in Common ownership into an asset, so you are an owner as an individual and your IRA LLC is an owner as a tenant in common, then upon the sale, the IRA LLC can take its portion and sit on its cash. It doesn’t have to reinvest in property again if it doesn’t want to. You can do your 1031 exchange on your portion into something else.

David Moore: Interesting. So, when we’re talking about combining personal and planned money, how about… Is it possible to combine a 1031 into a property that’s going to be jointly owned? And if so, how?

Tom Moore: It is.

David Moore: How?

Tom Moore: So, if you’re going into a piece of property and maybe you’re going up in value, because remember it’s always very important for your exchange, if you’re looking to defer all of your capital gains on your 1031 transaction, then you’ve got to meet your 1031 requirements. So, if I sell a property for $500,000 and maybe I get $300,000 in cash out of that sale, then all of my $300,000, again for full tax deferral, all of my $300,000 needs to be used to go out and buy $500,000 worth of property.

Tom Moore: You can bring in, if you’re going up in value, let’s say you’re going to go out and buy a million dollar property and your IRA LLC’s got $300,000 in cash sitting in it as well, you could go in 50/50 as long as my $300,000 is going in for my 50% ownership, the IRA LLC’s putting its $300,000 in for its 50% ownership, and then that difference that’s going to be borrowed money would have to again be through a non-qualified or excuse me, a…

David Moore: Non-recourse.

Tom Moore: Non-recourse loan from a lender. You would not be able to have a situation where the IRA LLC just throws in the additional $200,000 to make it a $500,000 purchase of a $500,000 acquisition and buy debt free because now my exchange has not met… I’ve got $200,000 in debt relief.

David Moore: Because that IRA is not you. I think when I’m talking to people, typically I think that one of the clearest ways I can explain to them, they often think that the IRA is them and do not think of the IRA as you. If you think the IRA is you, it’s a problem. So, think of the IRA as Suzie down the street, I say. So, if we’re talking about any time one of the biggest issues, the biggest issue with an exchange is always time, the second biggest is investing, right?

David Moore: And So, if we look at it in this situation, this context, if you wanted to combine that personal money via the 1031 and the IRA, 401 [k] funds into a common investment, it’s going to require what structure? It’s going to require the tech because of 1031.

Tom Moore: Because of the 1031, yeah. Because if I individually sell property, I have to acquire title to my replacement property in my individual name. Again, I cannot buy into a property as a member of a new partnership along with the LLC.

David Moore: So as Tom said, you can combine personal and plan money into a common investment, either as common members of an LLC or Tenancy in Common. But if you’re combining it via 1031, it’s going to require that Tenancy in Common structure. So, thank you for that explanation.

Tom Moore: Sure.

David Moore: Thank you for joining us today. And once again, Dave and Tom Moore, IRA Advantage, and it’s been fun today. Thank you.

Tom Moore: Yeah. Thank you.

David Moore: Look forward to seeing you soon. Don’t forget to like and subscribe. It really helps us out. Bye-bye.