Real Estate Tax Law Specialist - Your Guide to Maximizing ROI and Avoiding Pitfalls

1. OREIA 11 01 18 By Attorney John Hyre Iralawyer.com (614) 207-2441 johnhyre@realestatetaxlaw.com

2. My Qualifications • Attorney, Accountant, REI • I’ve assisted thousands of REI clients nationwide – and still do • REI clients range from brand newbies to large commercial operations • We see lots of “odd” deals • Lease options, subject-to’s, assignments, discounted note purchases, etc.

3. My Qualifications • Very few CPA’s or attorneys are well versed in RE or SDIRA’s • I know of none who have been through IRA audits, and few who have been through RE audits • I know of none who have beaten the IRS in Tax Court • I have done both – on multiple occasions • We’ll discuss some of the audits and what I have learned

4. For Whom? • Like Me – Just Going to Reinvest in RE • 60+ years of age • Not there – but will be

5. Why It Matters • Serious, Serious Money • Most of you “know” this • But you have not acted on it • You do not feel it in your bones • Let’s fix that little problem • Because no action = no results

6. One Rehab & Retail Per Year

7. 12% for Ten Years Compounded

8. 12% for 26 Years Distributed

9. High Return….High Risk. • Prohibited Transactions KILL IRA’s. • To be avoided at all costs. • Generally cost your IRA 50% to 60% of the balance. • Size does not matter. • Example: IRA with $1,600,000 M lends Mom $1 • Blatant Prohibited Transaction • Costs the IRA $1,000,000

10. “The IRS Would Never Do That” • Socialism is Expensive – That Healthcare was not Free • IRS is under massive pressure to collect • “…we conclude that the prohibited transactions contained in section 4975(c)(1) are just that. The fact that the transaction would qualify as a prudent investment when judged under the highest fiduciary standards is of no consequence. Furthermore, the fact that the plan benefits from the transaction is irrelevant. Good intentions and a pure heart are no defense.” • Leib v. Commissioner, US Tax Court Case No. 10688-85

11. Risk Can Be Managed • Where PT’s are concerned, be paranoid • I spend a lot of billable time on this subject. • Until the law becomes clearer, avoid even the appearance of a PT • Stay ahead of IRS – learn faster than they do • Some relevant, obscure and subtle examples: • Lending to/from uncle • Condo owned by IRA • Managing your IRA owned LLC • Remote management = no “services”, SDIRA will force you to delegate

12. Some Surprise Disqualified Persons • 50/50 JV Buddy • Trustee of most trusts • Other of your IRA’s

13. Common REI PT’s • Surprise Disqualified Person • Services • Bootstrapping • Indirect Benefit • Extension of Credit • Assignments

14. Inherited Roths • Arrange to inherit a Roth for tax-free income before retirement • Take tax-free income • Only catch: Mandatory RMD’s • Arrange for young family members to inherit – they may have tax-free income for 6+ decades • Avoid Purchased Inherited Roth • Avoid stupid “get big quick” schemes

15. UBIT Summary • Three Things Cause UBIT: • Rental of personal property (as opposed to real estate) • E.g. – furniture, construction equipment, meth labs • Borrowing • $100,000 property, $10,000 down, $90,000 borrowed = 90% of income UBIT-taxable • “Continuous Trade or Business” • Law practice, Dairy Queen, Flipping Business

16. UBIT Summary • 37% tax (+ state rates) after $12,500 income • Form 990-T • Starts SOL • Statute of Limitations 3 -6 years

17. “Blocker” • SDIRA-Owned C-Corporation • “Blocks” UBIT • 21% Corporate Tax rate • Beats 37% UBIT by 16 points • One-Time Funding from SDIRA • May distribute some or all of profits to SDIRA at will one or more times • May or may not make sense to reduce leverage

18. “Blocker” • Black Letter Law (not grey) • PRESENT LAW AND ANALYSIS RELATING TO TAX TREATMENT OF PARTNERSHIP CARRIED INTERESTS AND RELATED ISSUES, PART II, Joint Committee on Taxation, 2007 • Used by Universities, Romney, etc. • No “Services” • Careful drafting required • Blocker should not do many passive deals due to Personal Holding Tax

19. Shared Appreciation Mortgage • JV on continuous business activity (e.g. – flips) means UBIT • Lending generally does not give rise to UBIT • SAM: “Interest” = % of the profit (Interest in note defined as 40% of profit & term “profit” is carefully defined, etc.) • Tax Court has things it wants to see/not see in the Note (e.g. – should not look like partnership)

20. 401k’s Rule • PT Damage • UBIT Exception for Debt-Financed RE • Checkbook Control • Ability to borrow $50k • Mega Roth • “What’s a Roth 401k?” • DOL v IRS • Earned income from side business • Solo v. Regular v. Safe Harbor • Controlled Group Rules (Spousal Exception) • SEP – for Procrastinators

21. Checkbook LLC’s • Asset Protection • Speed/Convenience • Fees • NOT trusts in most cases • PT Issues • Complexity • Fanatics

22. The Future • Why the attention? • Expropriation? • Roth’s will disappear – but likely with a “grandfather” • Stay of execution due to Republican sweep • Income limit loophole will disappear • Inheritances will be limited • Tax are unlikely to go down • CB LLC • MAKE THE CHANGE. ACT NOW. • See RISE Act for Democratic game plan

23. OREIA Offer Regular Prices • Real Estate Investors KISS Guide to Entities $299 • Recorded 2-Day SDIRA Workshop $797 • Live Two-Day IRA Workshop (1 attendee) $2,000 • (12/1 & 12/2 in Columbus, OH – may substitute later workshop date if cannot attend this one) Total $3,096 OREIA Price $1,499

24. Dec 1 & 2 Workshop • Roth v Traditional • 50% Q&A (vs. $400/hour) • Limit 50 people • Prohibited Transaction – Sick Detail • Choice of Accounts & Forgotten Accounts • Back Door Roth & MegaRoth • UBIT • Checkbook LLC’s • Blocker Corporations, Shared Appreciation Mortgages, Preferred Dividends LLC’s • Audit & Tax Court Experience • Structuring & Networking