How to Legally Reduce Taxes and Multiply Your Real Estate Investments with an IRA

What if I told you there is a way to invest in real estate and grow your wealth tax free and cut your tax bill by 50%? This isn't a loophole. It's a proven strategy that high level investors use to legally protect their capital while scaling their portfolio. If you have an IRA and want to use it to invest in real estate, this is a must watch. So today I have Jeff Watson joining us who is an expert in self directed IRAs and investing in real estate. If you want to grow your wealth and tax free and do it legally, you need to check out this training. He's going to break down exactly what you need to do. Let's get into it.

You have ideally the opportunity to invest in an apartment syndication and you have a traditional IRA or you have an inherited ira. I'm going to describe the inherited IRA a little bit more precisely. It's in an IRA that you inherited sometime after January 1st of 2020. So you have the 10 year distribution rule on that inherited IRA. In most those instances it is going to be a traditional IRA that you inherited. So you have a traditional IRA or you have an inherited traditional IRA and you want to do two things at the same time. You want to grow it and you want to pay less in taxes on it. Because you know if it's traditional, it's inevitably going to be taxed at some point or another. We know as a matter of fact law and policy that traditional IRAs are tax infested. Once you hit 73, you have to start taking money out as a required minimum distribution and it is a taxable event from a traditional Iraq. So I'm going to spend my time Talking about traditional IRAs and inherited traditional IRAs and this very advanced concept. This is something I have done for a number of clients over the last two to three years and every one of them walks away with a smile on their face. So what we do is we find a good real estate deal to invest in, a syndication of some sort, a multiple member LLC where that IRA is going to be a minority owner owner, not a majority, but a minority owner. The smaller the ownership percentage, the better. Okay. And once we get below 10%, it doesn't really matter after that. We have to identify is we're talking about a good apartment deal, then we're looking to raise capital for a good apartment deal. And so I'm going to show people why they want to look at a good apartment deal and be eager. I'm going to say that again. Why they want to look at a good apartment deal and be eager to put traditional IRA dollars in or inherited traditional IRA dollars in. They're going to invest, let's just say 50 or $100,000, for example. 50,000 or 100,000. You're one of 30 people putting $100,000 in. So you're raising $3 million this way. I. We're going to go take down a $7 million apartment complex, and we're putting together 30 million this way. GPS are bringing in enough money. We're going to go 50% down and 50% financing. That's, that's the overview of the deal. When the offering is closed, when the deal is completed, as in closed, purchased, acquired, that account holder is now listed as either a limited partner in the syndication or, or they're a minority member of the acquiring llc, their IRA is that. And now we're looking at the deal and we're saying, okay, Jeff, where's the magic? And this is where I open up the magic trick box and I go, how would you like to make money but pay even less in taxes? Is there anybody in favor of that? How would you like to make money but pay even less in taxes? Well, if you're not excited about that, then just kind of, just kind of like doze off for the next few minutes. Okay, we've now closed the deal. And so what you're going to do is then you're going to say, hey, I understand that I have the right to convert that traditional IRA investment from traditional to Roth, because if I convert it to Roth, then all of the profit that occurs is going to be in the future, 100% tax free if I wait more than five years and I'm over 59 and a half. So, okay, we'll get into the conversion rules in just a minute. I want to get this concept down, but you're going to say, I don't want to convert all $100,000 from traditional Roth because I don't want to pay 28 to $33,000 in federal income taxes on that conversion. To which I'm going to say, no worries, my friend. No worries at all. I got you. I gotcha. Because the IRS rules in a different set of the book, in this massive code book, allow for what we call discounting. There's the word that every investor needs to write down. Discounting. We're not buying it at a discount, we're converting at a discount. Now, there are some very well settled, established legal parameters on these conversions at a discount. And I'm going to walk through two of Them. The first is that there is a discount for the lack of control. You're a limited partner, you're a minority member of the llc. How much control do you have? Very little to none. You might have the right to occasionally ask a question at a meeting and you got a right to look at the books other than that. Nuh. So we see a discount ratio, that lack of control to be somewhere between 20 and 35%, depending upon a host of variables, depending upon how slanted the operating agreement is in these deals and the more power that is retained by the managers and how little control the little minority member has, that will move up to a higher percentage of the discount in that sliding scale of between 20 and 35. So you can say, well, Jeff, what does that mean? Well, that means that if we take that discount and we apply it to the hundred thousand dollars, we've now discounted that hundred thousand dollars down to say $70,000, because that's what an independent, reasonable third party person might pay for that position, given the lack of control. But wait, it gets better. You can get a second discount on top of the first discount. Now everybody that loves to go shopping at Target or Target or anywh house, they love stacking coupons and discounts on discounts and sales on discounts, right? We take a second discount. That second discount is for a lack of liquidity. Now wait a second. We knew going into this deal that it was going to be illiquid for three to five, maybe even seven years. We knew it was a long term play. But when we're converting it from traditional to Roth, we can take that lack of liquidity discount which is in that range of 25 to 35%, and we can add it to the other discount. And so we can take that 70 and discount it by 30%, which would be another $21,000. And so now that $100,000 conversion is taxed at $49,000. So instead of paying a 32 or $33,000 tax bill, you might only be paying a 10 or a $12,000 tax bill because you were probably now in a much lower income bracket because $50,000 or $51,000 of what may have pushed you into a higher tax bracket is now gone. And you may now be hanging out in the 18 to 22% bracket instead of the 26 or 33% brackets. Now it gets better. I know that's great. I know that's fantastic right there. But it gets better. You can then do the conversion, re register the investment with the Sponsor with the syndicator, with the oper, with the man, with who's ever updating the records of the llc and so on to where it's now, instead of Fred Flintstones Traditional ira, it's now Fred Flintstones Roth ira. And so that happens, we do all that, and five months after the deal closes, three to five years later, the property is now nicely stabilized. Rents are up, values are up. There comes an appraisal in. Everybody looks at it, gets excited, and we decide, are we going to refinance this thing and take a bunch of equity out and distribute it out, or are we going to sell this thing and everybody take their money and go home and play again some other day? So they decide to go ahead and sell this thing. And so Fred Flintstone's $100,000 investment that he converted at 49,000 pays off at $100,000, plus the profit back into his Roth account, which is. You can't touch it, irs. It's mine, not yours. And then, so let's just say you doubled your money. Let's just say it was a home run, granddaddy smack deal. You put in $100,000 out of your traditional, converted it to a Roth at 49,000, you paid the taxes on it. Five years later, you sell it, you make back $200,000 and into your Roth IRA. The IRS can't touch it. Now, if that doesn't have at least somebody doing a happy dance or a happy wiggle in their seat, then I didn't do a good job explaining it. You, as the account holder, can't just walk out one day, look up at the sky and say, oh, you know, I think that I'm going to discount my own account. I'm going to tell my custodian what it's worth based upon what I heard Jeff say on this one. Zoom call. Nope, that doesn't work. Your custodian is going to say, I need an opinion letter from a knowledgeable, educated person who has experience in this area and their professional opinion as an appraiser, as an accountant, as an attorney. That's what they're basing their opinion on. And the answer to your question, Mike, is there are no income limits on this. There are no income limits on that. There are no income limits on converting traditional to Roth. So you can hire an expert, myself or some other people out there that do this. We will review all of the documents of the deal. We're going to ask for a lot of stuff. It's going to be painful. It's going to be arduous. You're not going to want to answer all of our questions, but we got to have it. We got to have a well documented file. And then I'm going to write you a three page opinion letter laying out all the facts, citing sections out of the operating agreement regarding control and lack of liquidity and all these other things. And then I'm going to give you a number and then you can go to your custodian and then you go, listen, based upon this opinion, I want to convert this traditional IRA investment of 100 over to a newly opened up Roth conversion account. And I'm going to convert it over at $49,000. And you're going to give me a form at the end of the year, a 1099 that says that I took out and did a conversion. So I got to pay tax on 40 on $49,000. That is two of the major discounts that we use. There are other ones out there. Now. I have done discounts in unique situations where there's litigation. Oh, I love evaluating litigation and giving a discount opinion there. I mean, that's the vagaries and the uncertainties of litigation. Allow for some really steep percentages.

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