1.)  Paying too much. Experienced investors will tell you: Make your money when you buy. Not when you sell.

This means that whatever the investment, the best investors are buying assets at a discount to the intrinsic value of the property. Time and reasonable care and effort will result in unlocking            value, and you can profit handsomely simply by selling the property for what it is worth. You do not have to hope you find a foolish buyer willing to give you more than it is worth. That is not a        strategy. Find unloved properties, ugly ducklings and hidden gems that you can buy on sale, take a little care, fix them up, and you can rent or sell for a fair price.

2.)  Doing business with relatives. It is not a great idea in any context. But if you do business directly with the wrong relative in your Self-Directed IRA, it is actually illegal – and could        result in severe fines, taxes and penalties.

Congress expressly forbids owners of Self-Directed IRAs from using them to buy from, borrow from, lend to or sell to certain family members. Specifically, you cannot transact with these              individuals:

• Your spouse
• Your own descendants and those of your spouse
• Your own grandparents and great grandparents and those of your spouse
• Your attorney, accountant or advisor who advises you on your Self-Directed IRA in a fiduciary capacity
• Any entities controlled by any of these prohibited counterparties.

3.)  Commingling funds.  You cannot involve your own personal funds in your Self-Directed IRA investment in any way. All purchases related to your investment must come from your Self-  Directed IRA account that contains the property. Technically, by law, you cannot even change a lightbulb in your property unless you bought the bulb with money from your Self-Directed        IRA account.

Self-Directed IRA owners should work closely with American IRA, LLC to ensure that all transactions related to your property are routed through your IRA account.

4.)  Accepting rent payments personally. If you are renting out a Real Estate IRA property, you cannot accept a rent check made out to your own name. Rents and all other payments          related to your Self-Directed IRA must be made out to the entity that holds the property, or to your Self-Directed IRA account itself.

Likewise, you cannot take a cash payment directly. Doing so risks having the IRS declare the payment to be a prohibited transaction, potentially triggering the disallowance of the Self-              Directed IRA’s tax advantages, along with tax liability, penalties and lots of legal bills.

5.)  Signing a personal guarantee for a real estate IRA mortgage. The law mandates that you cannot pledge your Self-Directed IRA asset as collateral for a personal or business loan      outside of the IRA. All mortgages on your Self-Directed IRA property must be on a non-recourse That means that in the event you default, the only course the lender can take is to foreclose          on the property itself. They cannot come after you, personally. If you sign a personal guarantee, or pledge non-IRA assets to secure the loan, the IRS could strip your account of its tax-                        advantaged status, resulting in significant taxes and penalties.

6.)  Forgetting about RMDs. Real estate is highly illiquid. But if you have assets in a Self-Directed IRA, Self-Directed Solo 401(K) or other tax-deferred savings vehicle, you will need to  come up with cash each year to make your required minimum distribution, beginning by April 1^st of the year following the year in which you turn age 70 1/2.

Self-Directed IRA owners should plan ahead so they are not caught in a cash crunch, unable to quickly raise the money within the IRA to make the RMD.

7.)  Paying a high percentage each year just to hold the asset. Many Self-Directed IRA firms charge a percentage of assets under management to hold IRA properties on your behalf.      Many times this is needlessly expensive and inefficient.

For investors who tend to buy and hold over long periods of time, switching to American IRA’s flat-rate, menu-based fee structure, rather than a high expense ratio, wrap fee or other AUM                charge can save thousands of dollars each year on fees.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Or visit us online at www.AmericanIRA.com.

The Tax Cuts and Jobs Act – the sweeping series of Tax Cuts Congress passed at the tail end of December 2017 – included a bit of Christmas cheer for dedicated Self-Directed IRA investors.

Normally, as most readers are aware, there are no current year tax consequences for dividends, rental income or capital gains as long as the money remains within a Self-Directed IRA of any type. The income or gains continue to grow tax-deferred, or in the case of Self-Directed Roth IRA accounts, tax-free (as long as it stays in the account at least five years).

But that tax benefit does not apply to income or capital gains that are attributed to borrowed money. Instead, a special tax on what is called UBTI (Unrelated Business Taxable Income) applies.

You see, you only get the tax advantage on your own invested money – not on money you borrow from other people!

So, if you have 45 percent equity in a given property within a Self-Directed Real Estate IRA and you have a mortgage covering the other 55 percent, then 55 percent of your income from the property, and 55 percent of any capital gains from that property are federally taxable – at a punitive maximum rate of 37 percent!

The same principle applies to stocks and other securities in a Self-Directed IRA that are bought using a margin loan, and in certain cases, investing in an active business or trade via an LLC or other pass-through entity, such as a limited partnership. (S-corporations are pass-through entities, of course, but you cannot own them within a Self-Directed IRA, so they do not apply to this discussion).

Some Self-Directed IRA investors try to limit the impact of taxes on UDFI (Unrelated Debt Financed Income Tax) by creating a C corporation, and then using the C corporation to make the investments. It is a tax planning tool called a C corporation blocker.

Here is how it works: C corporations benefit a great deal from the Tax Cuts and Jobs Act, which reduces the corporate income tax rate from 35 percent to 21 percent. The corporation itself releases the dividends to the retirement account, rather than to the taxpayer directly, and they do not come from the property itself.

Obviously, there is a big difference between a 21 percent tax rate and a 37 percent rate, or even the old maximum income tax marginal rate of 35 percent.

Meanwhile, the real estate or other leveraged investment does not pay its income and gains directly to the Self-Directed IRA. Instead, they go to the C corporation.

When set up correctly, this is a big improvement compared to paying the marginal rate on your personal income tax returns, which is where your unrelated business income tax would wind up.

American IRA, LLC does not provide individualized tax advice. The information in this article is for general informational purposes only and should not be construed to be tax advice in your individual case. Readers should engage the services of a qualified tax professional, such as a CPA or enrolled agent before taking action.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Or visit us online at www.AmericanIRA.com.