In May 2018, I passively invested $100,000 from my Self Directed IRA into a value-added #multifamily real estate #syndication, with an expected doubling of my investment in 5 years. I soon realized I would have an income tax liability on $200,000 of #passiveincome. In December 2018, I partnered with my CPA, IRA custodian, and investment syndicator, to pay tax on the corn seed and not the harvest, at today’s historically low income tax rates, by executing an in-kind distribution. This transferred my investment from my SDIRA account to my individual name. My tax liability was based not on my original $100,000 investment, but on the fair market value (FMV) of the investment in December 2018. Since this was 6 months into a value-added investment, expenses were at a high point, while rents and occupancy had not yet benefitted from the value-added improvements. Therefore, the Net Operating Income (NOI), and hence the FMV, was at a temporary low-point of only $80,390. Because bonus depreciation and cost segregation were implemented on this investment, there was $67,378 in depreciation. As a result, my taxable income from my #IRA in-kind distribution of my original $100,000 was only $13,012, which was the $80,390 FMV less the $67,378 depreciation. That’s almost #taxfree. As a bonus, when the investment eventually sells, I will be paying the lower capital gains tax rate, not the income tax rate. Here are the 7 steps I followed to execute this transaction:
1. Ask your syndicator’s managing member to write a letter, on company letterhead or including the syndication name and address, with a wet ink signature, acknowledging the transfer of ownership from your IRA custodian to you personally and including the FMV, and any supporting detail your IRA custodian may require. Tip: to encourage your syndicator’s cooperation, offer to draft the letter.
2. Submit the IRA custodian’s FMV Form, which must match the information in the managing member’s letter.
3. Submit the IRA custodian’s Distribution Form.
4. Receive a transaction notification confirming the in-kind transfer from the IRA custodian, which will trigger a 1099-R for income taxes.
5. Submit a new ACH form to your managing member so future distributions go to you instead of to your IRA account.
6. Receive a 1099-R documenting the tax liability based on FMV at the time of in-kind distribution. Tip: make sure to time your in-kind
7. Receive K-1 documenting current year loss due to bonus depreciation and cost segregation.
Jeff Bartlett is a multifamily real estate investor and syndicator based in Dallas Fort Worth, and a member of the Brad Sumrok Apartment Investor Mastery Mentorship Program. To receive a pdf of the actual transaction documents for this case study, or to learn more about the benefits of multifamily real estate investing, review Jeff’s LinkedIn profile and Connect at: https://www.linkedin.com/in/bartlettmultifamily
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