Unraveling the Mystery of Investing in Notes inside Self-Directed IRAs

Buying Notes Secured by Deeds of Trusts or Mortgages

What does that mean?  What are the benefits of buying notes?  How can you get started?  Our guest describes it as “Dancing between property and paper.”  Dawn Rickabaugh is the owner of NQ Capital (NoteQueen.com), a small, family-operated investment company that buys both property and paper.  She buys seller-financed notes across the country and helps others get started investing in promissory notes secured by deeds of trust, too.  She also buys & sells real estate in Carson City, Nevada (Reno-Tahoe area), and consults in real estate transactions that involve owner financing.  

Investing in Notes Inside Self-Directed IRAs or 401(k)s

Self-Directed IRA and Individual 401(k) Plan account owners have become increasingly frustrated with Wall Street.  Real estate investors want to invest in what they know, understand, and love – real estate.  And yet, so many IRA Custodians only allow stocks, bonds, and mutual funds as investment vehicles.  

Investors want options, choices, especially when it comes to real estate.  Investing in promissory notes secured by real estate – often referred to as buying paper – inside of a Self-Directed IRA and Individual 401(k) Plan is one such option.  You can buy and invest in real estate, deeds of trust, mortgages, promissory notes and other “paper” inside Self-Directed IRAs and Individual 401(k) Plans.  Join Dawn Rickabaugh and host Bill Exeter as they unravel this mystery today! 

 

Email your Self-Directed IRA and Individual 401(k) Plan questions to ASK@exeterco.com and we’ll address them in our next episode.

Investing in Promissory Notes Secured by Deeds of Trust and Mortgages Inside a Self-Directed IRA or Individual 401(k) Plan

Next Episode of Go Ahead, ASK! Podcast 

Join us on the next episode of Go Ahead, ASK Podcast as we unravel the mystery of investing in Delaware Statutory Trusts (DSTs) as replacement property options for 1031 Exchanges.  You can email your Delaware Statutory Trust (DST) questions to ASK@exeterco.com or call (619) 239-3091 and we'll cover them on the Podcast. 

Unraveling the Mystery of Self-Directed IRAs on Go Ahead, ASK! Podcast (SDIRAs)

An Introduction to Self-Directed IRAs (SDIRAs) 

There has always been lots of questions and confusion surrounding Self-Directed IRAs and Self-Directed Individual 401(k) Plans (often referred to as "SDIRAs" and "Solo-Ks).  The more common questions asked by those investors who are just learning about Self-Directed Retirement Accounts often include: 

• What is a Self-Directed IRA or Individual 401(k) Plan?
• What type of assets can my SDIRA invest in? 
• What are Alternative (Non-Traditional) Investments?
• How can I get started and investment with a SDIRA?  
• Which IRA Custodian is right for my investment goals? 
• Can I buy my personal residence inside of my SDIRA
• Can I loan money to myself or a family member?  

Investors often query 3 or 4 different advisors, brokers or financial institutions and walk away with 3 or 4 different answers.  These responses are often just the advisors' opinions and create contradictory and confusing guidance for many self-directed, do-it-yourself investors (DIYI).

Unraveling the Mystery of Self-Directed IRAs 

Self-Directed IRAs and Individual 401(k) Plans are powerful, tax-favored, strategic retirement saving and planning tools that every real estate investor should at least consider.  The Exeter Group Unravels the Mystery of Self-Directed IRAs and Individual 401(k) Plans on Go Ahead, ASK! Podcast with Bill Exeter, President and Chief Executive Officer, The Exeter Group of Companies, including Exeter Trust Company that serves as an IRA Custodian.  Join us now....

An Introduction to Self-Directed IRAs (SDIRAs) and Individual 401(k) Plans (Solo-Ks) 

Next Episode of Go Ahead, ASK! Podcast 

Join us on the next episode of Go Ahead, ASK! Podcast as we unravel the mystery of Title Holding Trusts (Land Trusts).  You can email your questions to ASK@exeterco.com or call (619) 239-3091. 

When Are IRAs Truly Self-Directed IRAs

Talk continues regarding opening Self-Directed IRAs (SDIRAs) and managing or self-directing one's own Individual Retirement Accounts, including, but not limited to: 

• Traditional IRA
• Rollover IRA
• Inherited IRA
• Roth IRA
• Roth Conversion IRA
• SEP-IRA
• SIMPLE IRA
• Individual 401(k) Plan (or Solo-K) 

Self-Directed IRAs 

The term "Self-Directed IRA" is used somewhat loosely in the retirement industry today. The bottom line is that each and every IRA is "self-directed" because the investor chooses what financial institution to place it with, and if the investor does not like the product, investment or service, they can choose to move it via an IRA-to-IRA transfer to another IRA Custodian with no tax consequences as long as you follow the rules. 

IRA Custodians

The issue with Self-Directed IRAs is not whether you can "self-direct" your own IRA, but which self-directed IRA Custodian should you choose. You must first decide what type of investments you wish to invest in inside of your Self-Directed IRA before you begin searching for and evaluating possible self-directed IRA Custodians.  

Real Estate Related Investments

There are relatively few IRA Custodians that allow you to actually invest in promissory notes that are secured by deeds of trusts or mortgages, tax lien certificates, non-trade REITs, real estate, and much more, for example. You need to shop around, and once you have found the short list of Self-Directed IRA service providers you must carefully evaluate their service quality. This is what sets the various providers apart from one another.  Most self-directed IRA Custodians that allow "Alternative Investments" are trust companies.  

Real Estate Expertise and Experience 

Trust companies generally have expertise and/or experience in retirement account administration and trust company operations, but few truly have actual direct expertise and experience in buying, selling, exchanging, or owning investment real estate.  You need to make sure that the IRA Custodian you choose has expertise and experience in both retirement account administration and real estate transactions.  

Can I Use the 1031 Exchange for Property Owned in My Self-Directed IRA?

We should first discuss Self-Directed IRAs or Individual Retirement Accounts. The term Self-Directed IRA is a little misleading since all IRAs are technically "self-directed."  What you ask? Yes, because investors decide where to place or deposit their IRA. They can change financials institutions as often as they like merely by requesting an IRA-to-IRA transfer to a new IRS Custodian. 

Self-Directed IRA 

The use of the term Self-Directed IRA is really referring to the ability of the investor to choose or "self-direct" his or her own investments within his or her own IRA. The difference is that many IRA Custodians limit the investment options that investors can invest. 

The wire houses like Merrill Lynch and big banks like BofA, Wells Fargo and Chase limit the investors choice of investments to publicly traded securities like stocks, bonds, and mutual funds. The same goes for online brokerage firms like Charles Schwab & Company. 

Alternative Investments

Some specialty IRA Custodians allow investors to invest in non-publicly traded investments, including real estate, mortgage loans, deeds of trust, tax lien certificates, non-traded REITs, and much more.  These specialty investments are often referred to as non-traditional investments, non-standard investments or "Alternative Investments."  

The retirement industry generally refers to these as Self-Directed IRAs, not because of the IRA Custodian but because of the ability of the investor to choose or "self-direct" unique investments inside of their IRA. 

1031 Exchange inside of a Self-Directed IRA 

This brings us to the question. Can an investor use a 1031 Exchange to defer the payment of taxes within an IRA for real estate that was acquired inside of the IRA and is now being sold. The answer is "it depends."

The IRA is already tax deferred in the case of a Traditional IRA, SEP-IRA or SIMPLE IRA or Traditional Individual 401(k) Plan or tax-free in the cast of a Roth IRA or Roth Individual 401(k) Plan, so the sale of the real estate inside the Self-Directed IRA is either tax-deferred or tax-free since the real estate is held inside of the IRA. The 1031 exchange would not add any value to the transaction.

Enter UBTI or UDFI

However, under certain circumstances, the sale of real estate held inside of a Self-Directed IRA could trigger a taxable event called Unrelated Business Taxable Income (UBTI) or Unrelated Debt Finance Income (UDFI).  UBTI or UDFI would trigger a taxable event and the Self-Directed IRA would have to file a 990-T tax return and may have to actually pay income taxes depending on the circumstances.  

In this case, completing a 1031 Exchange on the sale of real estate could defer the taxable event and avoid having to file a tax return since any taxable event under a 1031 Exchange qualifies for non-recognition of gain.  The 1031 Exchange can often allow the Self-Directed IRA owner to defer the taxable event and provide time to permanent resolve the issue depending upon the circumstances.