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How Tax Deferral Can Play a Role in Your Investment

by Jonathan Shaffer

Many people (and most investors) have an established IRA and/or 401k account. Many investors may also have an income producing investment, such as a single family rental and may want to use a 1031 like-kind exchange. We are going to briefly discuss using these vehicles and discuss if/when they can be used within a syndication.

Individual Retirement Account (IRA)Starting with an IRA, which there are multiple types of, a Traditional and a Roth are the most common. One is pre-tax earned income, while the other is after-tax earned income, respectively. These vehicles themselves are outside the scope of this discussion, but generally these accounts are set up within a brokerage account to invest in mutual funds, stocks, ETF’s, etc. In order to use these funds to invest in a real estate syndication, these funds would need to be transferred into a self-directed IRA account (SDIRA). These specific custodians that hold your account are more knowledgeable about alternative investment vehicles, such as real estate, notes, precious metals, etc. and allow investments into these assets.

Simplified Employee Pension IRA (SEP IRA)A SEP is a variation of the IRA and is adopted by business owners to provide retirement benefits for themselves and their employees. One advantage is that the contribution limits are based on income earned and when maxed out for the year provide a much higher limit for contributions than a Traditional or Roth that is not a SEP. These funds can be used to in a syndication if set up with a self-directed custodian.

1031 ExchangeA like-kind exchange, known as a 1031, for its numerical code within the IRS tax code, is a way to defer gain from a prior investment. An example might be that you invested in a single family rental property 10 years ago and have built up a large amount of equity, and instead of taking a capital gain upon sale, or disposition, and the subsequent tax bill, you can exchange that property for another property of greater value and defer your tax. This is a simplistic example, please refer to your tax advisor, or ours with questions.

At the end of the day, we are not always to participate in a 1031 exchange with all of our syndications. It really depends on the specific investment, the operator, and the amount of the exchange.

401kA solo 401k is also a great way to invest as a business owner. However, a traditional 401k through your company most times will not be allowed to invest in our syndication deals.

In summary, 1031 exchanges are difficult to do on your own personal investments to invest in our deals. Self-directed IRAs are an opportunity to invest with special custodians. Those same types of companies can help you invest in our syndications if you have your own business.

Please reach out for us to answer any of your questions.

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