Looking at MHP purchases, and note that many of the threads here (or most) deal w financing a significant part of the purchase. How are you all–who use retirement accounts–buying MHPs? If financed, my understanding is that the rental income and sale income will be taxed as a percentage of the portion that was financed, and at an estate/corp (40%) rate, the tax being called UBIT (unrelated business income tax).
Anyone out there with experience along these lines?
Hi Jim,
I am a former tax lawyer and I have to say, that is a very complicated situation that really requires a lawyer to sign off on. Tax-advantaged retirement accounts have strict rules and you can very easily trip over them if you are not an expert (which I am not).
Advice from people here who have done the same thing (if there are any) will give you a general idea of the financial picture, but for the details you want to have your situation blessed by a true tax lawyer (not just an accountant or your brokerage firm’s advisor) The penalty for misusing your retirement account funds can be very severe. You want someone who has malpractice insurance that will cover you if you get into trouble with the IRS.
That said, I think it’s a very neat way to generate returns from all of your assets and I’d be interested to hear if anyone has set things up this way.
– Note, I am assuming the idea is to fund a purchase with retirement account money, but have the net income stream returned to you currently and maybe some interest going back into the retirement account.
Brandon@Sandell
My advice is that if you are purchasing more than one property in your IRA, set up separate IRAs. That way, if you do something the IRS deems to be ‘bad’ and it declares your IRA to be taxable, it is ‘just’ the IRA that invested in that particular property that becomes taxable.
You’d buy separate MHPs in separate LLCs for asset protection. Similarly, finance your MHPs with separate IRAs.
My 2 cents worth (and hopefully a lot more),
-jl-
I looked at this a little more deeply and I think I misunderstood your plan. From what I understand you are categorically prohibited from “self-dealing” with IRA investments. That means you cannot take current income from a park financed by an IRA. You also could not manage the property yourself, or have a related party do it.
So I don’t think you would be able to finance with your IRA acting like the bank (you put in some percentage of the capital, say 50%, the IRA puts in 50%, the IRA charges interest and you keep the rest of the income) – this is what I thought you were proposing.
You can have an IRA purchase a park directly, though. It would work the usual way: the IRA puts in ~30%, the rest is financed through a bank, and the IRA takes the net income (and capital gains).
But if you buy a park with an IRA, all the income has to stay in the IRA. You would presumably do this through an LLC owned by the IRA. But because of the prohibition on self-dealing, that LLC could never pay you anything, e.g. a management fee.
For those who are following along, here is a website that describes the transaction that I think is being contemplated. Note, I found it through a quick Google search, and I have no idea how accurate the advice in it is.
http://www.irafinancialgroup.com/llcpurchaserealestate.php (scroll down to near the bottom).
If I understand that website correctly (and I may not have, and/or it may not be 100% accurate), the currently recognized income (ordinary and capital gain) is divided pro-rata between the portion that is earned by the “equity” investor (the IRA) and the portion that is earned through leverage (the bank’s pro-rata portion). The bank’s portion is subject to an additional tax (UBIT) because the IRS has decided it isn’t fair to let you leverage your tax-advantaged money and keep all the gains as tax-advantaged. You can only shield the income and gains of the pro-rata portion that was directly invested by the tax-advantaged account.
Unless an exception applies, in which case you’re either in the clear or totally screwed, depending on which exception.
It might help to think of it this way: If “X” partnered with a non-profit and made an investment, X would have to pay tax on X’s portion of the gains and income but the non-profit would not owe any tax on its portion. For your situation, the IRA is like the non-profit and the bank is like “X”. So you will owe this other UBIT tax on the bank’s (the financed) share of the gains.
That’s the basic idea. I would still advise you to talk to a tax attorney before setting this all up – don’t rely only on the brokerage or advisor.
Brandon@Sandell
Jim et al,
I have a lot of threads on this forum pertaining to SD Roths in particular. Search Financial Friends.
Yes, you have self dealing issues here - without a doubt. You also have leverage issues (can’t leverage within an IRA - UNLESS it is non-recourse), but the way you describe you have Self Dealing issues.
Here’s a clean way to do this is to have a financial friend do this with you. We are going to pick on Jefferson, because he’s so pick-on-able. 
Jefferson finds a $400,000. park to buy, Jefferson has no money for the down, but has great management skills. He calls me and asks if I know someone with some money to invest - he needs the down money. I happen to have a Roth IRA that is NOT self directed, so I get busy and get those funds transferred over to a Self Directed Custodian - there are several out there now - we personally have accounts in Equity Trust and Kingdom Trust - we like to use Kingdom Trust and are moving all accounts over - much better customer service, much faster and lower fees.
Ok, back to the structure - Jefferson goes to the local bank in the town the park is in and asks what kind of a deal they can offer. They want 25% down. My Self Directed Roth is sitting with the down money Jefferson needs - so my proposal to Jefferson is for $100,000 invested, my SD Roth gets an Equity Participation note that gives 10% of gross rents plus 25% of the upside when Jefferson sells. 25% of the gross sale price over the original $400,000. after sales commission and closing costs.
You can negotiate whatever you can negotiate - but the structure is very clean - we are not related parties - there is no self dealing with Jefferson and his Roth - the IRA doesn’t own a trailer park (liability) - the IRA doesn’t own an LLC (potential UBTI), etc, etc.
Jefferson buys a park with no money down, my Roth is invested with a great guy, who has great management skills in parks and everyone makes money.
Remember, it is near impossible for you to save enough yourself paying taxes on your gains. It is against IRC rules for you to do this with your own funds, your Dad’s funds, your Son’s funds, your Wife’s funds, etc. Why not help a friend climb this ladder two rungs at a time?
Financial friends can get you to where you want to go - and don’t be stingy with them. We view our financial friends’ accounts sort of like a savings account for us of sorts. Put as much away in their accounts, so you may redeploy larger amounts on the next deal. One day your portfolio is huge - and their retirement account is huge, helping each other grow - that’s the goal.
And then I can finance the next great deal Brad finds with my SDIRA. Brad helps me build up my retirement savings, and I help him build up his. Having financial friends, and being one for others, is a great way for all of us to save for retirement.
To everyone’s continued success,
-jl-