- Hey guys, in this video, we're gonna talk
about Wholesaling with Self-Directed IRAs.
It's something you need to learn about
if you're gonna be a wholesaler
because there could be traps waiting for you.
All right.
Let's get started.
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Okay, so why did I wanna cut a video
on Wholesaling with Self-Directed IRAs
but really had to do with my partner Toby
he went to teach in an event down in Florida
and there were a lot of wholesalers
at this event that were making really big money.
And it came up during the presentation
where some of the wholesalers
were actually doing deals inside
of their self-directed IRA.
But I got a call from Toby and he said,
"Hey, have you heard about people doing wholesales
"and self-directed IRAs before?"
And I said, "Yeah, I've heard about it."
But the details are what's so important.
Now here's the problem, all right.
Many people will set up a self-directed IRA, right.
So you get your IRA set up
and you will roll in your existing funds.
And the reason you wanna wholesale through here
because it's a way you can make tons of cash
from a relatively simple making, some offers,
turning those offers over to someone else.
And then all the cash runs back into here.
And that's exactly what these wholesalers
in this class were doing.
They were going out and they're finding deals
and they get a house under contract, right.
They get this house under contract,
then they enter in the contract
with the seller of the property.
Then they'll assign the contract to their self-directed IRA
which in turn will sell or assign it
to the individual buyer over here.
Now there's a problem here.
This is called a prohibited transaction
because in this type of scenario,
if you're wholesaling with a self-directed IRA
what you're doing
is you're entering into the deal individually, okay.
On behalf of your...
Not on behalf of your IRA but just yourself
and then you're assigning it over.
You're making a contribution of that contract to the IRA.
That is the first problem.
If you're gonna wholesale through self-directed IRAs
you cannot set it up this way.
It will blow up your IRA in all of the income
or assets you have inside of there
will immediately be distributed to you.
You'll be have to pay income tax on it,
early withdrawal penalties, penalty taxes.
I mean, you wanna lose 65, 70% of your IRA
go down that road.
Okay, so we talked about that
and we got this straightened out
with some of the people
and then another investor would come up and he would say,
"Well, hey, I'm not doing it that way.
"I'm doing a little different.
"I'm actually making the offer
"in the name of my self-directed IRA."
So in this case, the IRA owner here would contract
on behalf of his self-directed IRA to buy this house.
So the IRA would go on the purchase and sale agreement.
Then the IRA would flip the property over to the end buyer.
And then the buyers come and close on the deal.
So let's say they make a $10,000 wholesale fee
off of this deal right here, paid by the buyer
who pays the money to the self-directed IRA.
Question to me was problem.
Well, actually, in this case, it doesn't solve it as well.
There's two issues here.
So in this particular scenario,
what's going on is that the IRA owners,
is the one out there putting these deals together
The income itself, the 10 K
that is not being generated from an investment.
See with an IRA, the income, the appreciation assets
it comes from things external of you.
It's not through your efforts.
Here, I mean, some people say,
well, you can trade in the stock market.
You're making the trades, that's in your efforts,
no, you're making the trades
but the effort or the income
comes from the rise in the stock value.
That's where the money comes from.
Here, it comes from you negotiating with the seller
and then negotiating with the buyer
putting two people together
and getting paid for your services is what you're doing.
You're getting paid for your services
because this doesn't happen in a vacuum.
It'd be completely different
if you entered into an agreement
tied this property up under contract
and there was a somewhere where these things are listed
and somebody came along, they saw it
and they wanted to buy it.
And they bought it off a board somewhere,
possibly that might work.
But in this scenario, it ain't gonna fly.
So you would be considered engaged
in a private transaction with your IRA,
even though you entered into the contract
with the seller through the IRA
because it's your services.
That's problem number one.
Problem number two in this scenario,
wholesaling is considered to be active income.
So not only do you get hit
with a prohibited transaction PTs on this,
you're also going to get hit with UBTI,
Unrelated Business Taxable Income, okay.
UBTI, it's different than UDFI,
Unrelated Debt Financing Income
that I talk about with using IRAs to purchase assets
that are leveraged.
This is Unrelated Business Taxable Income.
And it means this, your IRA, which is a tax deferred
or possibly tax-free entity
can engage in an active business.
Wholesaling is considered to be an active business.
And some people I've had will argue with me on it.
So I was talking to wholesaler.
He goes, "No, it's not Clint.
"It's not an active business.
"It's passive that wholesaling property,
"it doesn't require me to go out there.
"I'm not paying wages on this."
I said, "Well, you should."
But let me give you another scenario here
to think about you.
You yourself are engaged in wholesaling
on the outside of your IRA right out here.
So you're making money, wholesaling, active business.
Then you're doing the same activity through your IRA.
It's an active business out here
but why is it not an active business in here?
It is, it's in both places.
In fact, if you're doing it outside of the area
you've even made it worse for yourself
because it's so easy now for the IRS to walk up
and say, yeah, look at you making the act.
Here's your business and you're doing the same business
through your IRA.
All subject to tax at 37% on all your income.
So first what they would do, they tax you on your income
at 37% because it's subject to UBTI.
After they do that, then they say,
Oh, you engage in a prohibited transaction.
So now you have to pay personal income tax penalty taxes
and early withdrawal penalty taxes
on pulling that money out.
Oh my gosh, you figured that out,
you're probably losing 85, 90% of your IRA
because you decided to wholesale through it.
Now you come to this channel
because you're looking for solutions.
So is there a clean solution to do this?
Well, I thought about it a lot
and there really isn't a real clean scenario here.
How to put this together.
I mean, if you wanted to kind of wash it a bit
there's two ways in which I could see doing this, right.
The first would be to create a limited liability company
have an LLC set up.
And this LLC that you've set up
is the entity that deals with the seller, all right.
And it's also the entity that deals with the buyers.
Okay, so you're gonna run it in this scenario here.
Now, does this get us out of UBTI?
No, it doesn't.
If it ever got looked at, they can say UBTI
because there's a business activity here
an active business activities taking place
because this is owned 100% by the IRA,
it's looked through, the IRA is considered to be engaging
in that business itself.
Does it get us around the prohibited transaction though?
So forcing the IRA to be distributed out to us, possibly
because now when you're engaging in this transaction
you're doing so as a manager of your LLC
and not as IRA participant,
I know we're splitting hairs
but it's important to recognize the distinction.
So I think that's closer to finding protection
but is there a better way?
Yes, but it's not going to help save you on any taxes
because the other solution would be to set up a LLC taxed
as a C-corp and have it owned 100%
by yourself directed IRA
and now you engage in this scenario.
You're not gonna run
into the Unrelated Business Taxable Income issue
because the C-corp is the business.
It's gonna pay tax on the money.
So if you made 100K here
you're gonna pay tax at 21%.
So where's the benefit for the IRA?
Well, if you make a dividend to the IRA
then that dividend that comes down here
and say that's the remaining 79,000.
That's not gonna be taxable to the IRA.
So now you've avoided anything to do with UBTI.
You're also going to avoid the prohibited transaction
most likely in this scenario.
So that would be even a cleaner way
but it's not gonna be the best tax advantage way
for the IRA to earn the money
because you will have to pay tax at 21%.
Now, one last thing I wanna leave you with here
that you have to consider.
So with the recent change over
with the election where the Senate now is 50/50,
well, it's controlled by the Democrats.
It's put them in charge of the committees.
And so on the Senate Finance Committee
now there's going to be, there's been a shift
and it's gone back to a gentleman out of Oregon
that previously ran it
and one of one of the areas of which he focused on.
You've heard.
If you look at my old videos
I used to talk about this has to do with IRAs
especially self-directed IRAs
and 5498 that form that the custodians use
to report transactions inside of IRAs.
Well, they may go back like they used to under the prior
or previous administration to Trump,
the Obama Administration
when the Senate had control,
they were focusing in on real estate transactions
inside of IRAs.
And the way they do that
is by looking at 5498 and making a determination
to see if that IRA owns an interest in an LLC,
a corporation, real estate contracts,
private debt instruments, anything like that
that's not a security, that has to be reported.
So if you're in this situation
I think your best scenario is
if you can, if you don't have a rock,
get out of the IRA and roll into a pension plan
a qualified retirement plan, like a Solo 401k
and then engage in this type of transactions.
Because here's the thing.
If your Solo 401k was audited,
it's not gonna blow up your plan.
Number one, you won't blow your plan.
IRA's get blown.
First mistake you make game over, not with Solo 401ks.
The second thing is typically they're not audited.
There's no reporting to the IRS
on the types of transactions that I'm referring to.
Yes, you have to file annual 5,500
if you have over $250,000 in assets inside of your plan,
but it's not scrutinized.
So if you're a wholesaler
and you want to make money inside a retirement plan
your best bet is to structure it properly
or better yet, get into a Solo 401k.
All right, guys
this was Wholesaling and Self-Directed IRAs.
I know it kind of went this way and that way on it
but the reason why is it's so important
to appreciate the risk associated with this activity.
Hey, before you go, if you like the content on my channel
be sure to subscribe below and check out my other videos.
If you're wondering about how to trade
or utilize retirement funds to invest in real estate
I've got a playlist just specifically devoted
to self-directed IRAs and Solo 401ks
you can find that out on my channel
tons of information here available to you.
If you're a real estate investor
and you're wondering, you know, how to take advantage
of real estate and use business entities.
Thanks for watching.
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