One of the many things I have learned by being in real estate is that it is not how much money you make, it is how much you keep that matters. Boy, it can be had to keep! Every day, someone is trying to get their hand into my pocket. It might be my tenants. It might be the contractors I use. It might be the folks I buy supplies from. The taxman definitely has his hand in there. Every day I find that I have to work very hard at keeping more of what I make because they are working just as hard to take it away from me.
To keep people out of your pocket, you have to learn about many things. These things include prices, best practices, trade techniques, business strategies and rules, especially tax rules. Taxes are a part of our lives and there is no legal way to get out of them for the foreseeable future.
You can however learn about tax rules and thus reduce how far the tax man reaches into your pocket. If you do not learn these rules, you are, I think, being foolish. Perhaps the quote from Supreme Court Justice Leanred Hand says it best:
“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.”
Helvering v. Gregory, 69 F.2d 809, 810 (2d Cir. 1934), aff’d, 293 U.S. 465 (1935)
And so, in honor of the recent filing deadline that Americans face for getting their income tax forms submitted, I thought I would share a resource with you to help you arrange your affairs to do just that.
That resource is the self directed IRA.
Many of you may be familiar with IRA’s and the similar 401K retirement plans. You likely have them at your place of employment. They are generally great plans. However, with those workplace plans you can only typically invest in stocks, bonds or mutual funds. A self directed IRA is different. It is self directed. It is directed into items that you want to invest in and can better control, like real estate. You can therefore earn better returns and keep those returns sheltered from the tax man.
I have written about self directed IRA’s before so I do not need to go over all of that again. But I do want to re-emphasize how powerful this tool can be. For example, you may remember the US presidential race back in 2012 when Mitt Romney was running. It was revealed then that Mr. Romney’s self directed IRA was worth some $20 to 100 million! That is a rather nice chunk of change to shelter from the tax man. You could do that as well, but you need to understand the rules.
The Rules Can Be Complicated
I also want to emphasize that the rules regarding self directed IRA’s can be rather complicated and it can be easy to mess up, trigger a tax penalty and invalidate the IRA. The IRS has determined that you, the IRA owner are responsible for knowing the IRA rules and knowing what kinds of investments can be made and what the prohibited transactions are.
To help understand all of these rules, Matt Sorensen, Attorney at Law, wrote a very useful book called “The Self Directed IRA Handbook.” I just finished reading it and I think you will find it both helpful and informative.
Mr. Sorensen is very thorough explaining the rules related to self directed IRA investing. He uses both case law and examples to help you understand what the rules are. This is not a book to tell you all of the different types of investments you can make with a self directed IRA, nor will it tell you how to invest. But it does lay out the ground rules well and tackles complicated subjects like UDFI taxes (what is that?), disqualified persons and prohibited transactions in fairly easy to read English.
I’ve had a self directed IRA for over a decade. Equity Trust is the custodian I use. I have bought several pieces of real estate with it. I have also partnered with other IRAs and considered several different kinds of investments. So I think of myself as somewhat knowledgeable on the subject. But in reading Mr. Sorensen’s book I learned a new trick or two. Such as;
- Potentially setting up separate IRAs for each property, and
- What types of loans you can get using your IRA.
His book also got me thinking about how to be a bit more creative in the future and how to potentially structure future deals.
The Sum Up
As, I said, you have to know the rules to help keep the tax man out of your pocket. You, not your attorney, not your accountant, are on the hook. This book will help you understand those rules and set your affairs in order. If anything, Mr. Sorensen uses almost too much case law in his examples. But you will come away with a solid basis of understanding.
You can purchase “The Self Directed IRA Handbook” through Amazon.com by clicking on the link below. If you do, please know that SmarterLandlording will get a small commission. That will help me keep things going here. So if you like what I do here at SmarterLandlording, please use the link below to order. Know also that I have never met or talked with Mr. Sorensen. I just read his book and thought the information was important to share with you. Thanks!
