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The Unmanned Writer |
^^^ This, in spade. Do not co-mingle finances between your household and the rental. If a renter sues you and finances are co-mingled, and then they subsequently win the suit, your house can be part of the settlement, not just the rental property. Create an LLC, keep separate accounts, and do not co-mingle the finances. Life moves pretty fast. If you don't stop and look around once in a while, you could miss it. "If dogs don't go to Heaven, I want to go where they go" Will Rogers The definition of the words we used, carry a meaning of their own... | |||
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| Member |
do you mean a 457B ? as in a .gov employee retirement account ? please get very specialized advice if you plan to buy and hold title in a retirement account. even partially. you will likely need to roll it over first as the PERS will surely tell you to kick rocks. if you plan to take cash from the 457/IRA to buy, consider the tax penalties of getting your hands on that money. Also: 1) getting a mortgage will be a real PITA. 2) the rental income flows to the IRA, not your personal non IRA checking account. make sure your IRA custodian will accommodate this, there are several around the Bay Area that clients used with success. 3) if you need to make repairs or pay taxes/insurance. make sure you understand the implications of taking yet more money out of IRA to cover this. It can be considered a distribution. if you need to put 20k rook on it, and write a check from personal funds it can be considered a disallowed IRA contribution I have seen a few clients do this over the years and the best way seemed to be 50% in name of IRA and 50% (or similar % but not 100% IRA) in name of owners personal name/trust/NON IRA entity. most gave up when they investigated. Another possible investment in your IRA is in a REIT or other LP or even private hard money loans as a fractional owner and the IRA is the lienholder and you have extremely limited chance that you will be asked to come in with more money. I was going to make my CA house a rental when I moved to FL because I could afford it and it would positive cashflow quite well. We sold upon discussing with the CPA and he said i'd need to file a separate CA return just for that rental as well as the 500k tax free gain. did we leave some cash on the table ? possibly as market has stayed strong. it could have easily tanked. I also didn't want to be a landlord from 2000 miles away. A tax attorney/CPA for the tax issues will likely know the LLC rules and if they don't do corporate formations in their office will have a referral for you of a business law attorney that does. | |||
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Member |
LLC or not, that is the cleanest way to handle it. Come tax time, all your transactions related to the property are running through the one account. Less likelihood of overlooking something. LLC for each property is a good idea as it can isolate the liability of the property from your personal assets and or other properties - think slip and fall. Place your clothes and weapons where you can find them in the dark. “If in winning a race, you lose the respect of your fellow competitors, then you have won nothing” - Paul Elvstrom "The Great Dane" 1928 - 2016 | |||
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| Team Apathy |
Yes, that’s what I meant. That’s funnny. 647 is the penal code section that covers both drunk and public and prostitution, among other things. I’ve typed 647f countless times in my career. That’s funny. I hadn’t even wondered if it was possible to buy a property under the banner of the 457 account. I always figured I’d just withdraw money from the account to fund the purchase of real estate. My first thought was to purchase a property outright but that creates a huge tax burden, though if it was done the year of retirement it might be doable as my income drops substantially… I’ll still have 3 kids under 17 for a few years after this change occurs, which helps. The sale of a home wouldn’t be considered taxable income given the capital gains exemption, right? What might be a better idea is just extracting enough from the account to secure a mortgage with enough in the bank account for a year of mortgage payments plus emergency fund for the property… I wouldn’t have near as much monthly profit from the first month of tenancy, but I’d substantially reduce my tax burden for that one year. I guess that is a question for a tax professional. Your thoughts on why you sold your CA property are things I am pondering too, and I think I’m leaning in the same direction you went. Cutting legal ties with CA seem wise. Counterpoint, as sjtill points out… once we cash out and leave the state it may be difficult to buy our way back in, should that ever come to pass. Of course, I don’t expect ever to come back here to live once we escape, but who knows. | |||
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| Member |
Under todays tax scheme The 500k cap gain on the primary res would be totally tax free. You would likely need to roll the 457 to an IRA with a firm that allows such investments. But yes you can take title to a home in an IRA. Pulling taxable cash out and then buying is meh in my opinion. If you’re under 59 you will pay a 10% penalty as well as regular income tax on the withdrawl. Even in a tax free state that’s a rough hit to buy real estate. If you are for sure never moving back to CA I’d sell and walk. It’s what I did. Then buy rental RE where you end up moving. If you do need a mortgage you will want to approach that with some caution as well if you retire and your income goes way down you may have trouble obtaining the mortgage vs say you know you’re moving to x city and buy before you move to that area. | |||
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| Team Apathy |
I can schedule an appointment with a representative of Nationwide as they maintain the 457 account. I am positive, though, that there is no age penalty for disbursements. The only real regulation there is I can no longer work for the organization I currently work for. Once that employment is terminated I’m free to withdraw from it without penalty, but it will be taxable income. If I “retire” in 27 and am ready to buy in 28, my federal tax will be manageable if I pull something like 50k. Having $6k (at current levels) in child tax credits will offset the bulk of federal taxes. | |||
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| Little ray of sunshine  |
A lawyer can help with deciding what entity will be best to own the RE and then in setting it up and making the proper filings. You need someone with familiarity with business entities and formation. The fish is mute, expressionless. The fish doesn't think because the fish knows everything. | |||
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Member |
As a lawyer, this is what I always recommend to protect your personal assets. ----------------------------------------- Roll Tide! Glock Certified Armorer NRA Certified Firearms Instructor | |||
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| Member |
I forgot the 10% penalty doesn’t apply to 457 like 401k, lucky you. Still seems like expensive money to give ~25% away. Also please run the math real tight. Both for yourself and your lender. 1.35% of purchase price for tax and insurance is a good rule of thumb. Also whatever your rent estimate is, even if you have a lease in hand, your lender will whack 25% off the top. I’m pulling this completely out of the air but let’s make a hypothetical purchase of say 600k with 20% down. Your T&I is 675 estimated. 480k at 6.75% payment is 3113. (assumed rate based on loan being a rental) Rents are maybe 3k to 3500 for a 600k house in San Joaquin County? Based on the friends and buddies I have that live from Tracy to Lathrop to Manteca. Used to have friends in Salina and oakdale but they Unless you are putting a lot more down it’s tough to make it work. Your other inputs may be way different than my estimates. A lower cost house way further out in the sticks isn’t going to command as much rents. So same problem. The main issue is in CA at least prices are out of proportion to rents. Don’t forget a property manager unless you’re doing this yourself. Also don’t forget a house mag sit empty for a few months. Your Banker doesn’t care. All this before anything else. Like a mow and blow gardener or your tenant calls you at 3am on Christmas becuase the toilet is flooded. And say I’m wrong and you squeeze the numbers and put more down and find a house that cash flows. That’s a lot of effort for a few hundred bucks a month and a few $k tax deductions in April. But at what opportunity cost ? You can get 4-5% risk free on cash right now. Make sure your ROI and ROE is worth it. If you’re only holding because you think the housing market still has room to run. That’s fine. Think about the sell. Commissions and and depreciation gets recaptured unless you 1031 and then you have the same problem as above. Have you looked at commercial? A triple net fast food building right off the highway that’s been there for decades and will likely be there in decades to come pays solid rents. I’m really not trying to be a negative Nancy. I love seeing people succeed. I just want folks going into a deal eyes wide open. I have had this same conversation with hundreds of investors the last 20+ years who are asking for a loan to finance it. And these are the questions any lender will ask and analyse. The answer is almost always more cash down. | |||
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| Shit don't mean shit |
A few years ago I toyed with the idea of using some of my 401k to make real estate purchases. I talked to a CPA and he highly advised against it. I realize you have a 457 and not a 401k, and I don't know the legal or accounting rule differences between them. He said this topic comes up every once and a while with his clients. He said in every case he advises against it, and if the clients want to proceed any way he tells them he can't be their CPA any more. Apparently there are many, many ways for it go south from a tax perspective. I would highly recommend getting input from a CPA. Earlier this year I formed a LLC with my Secretary of State for a side business idea I have. I'm putting all the pieces in place now for a launch in March 2025. I have an EIN, separate bank accounts and am going to transfer some assets over the the LLC. One topic I'd encourage you to look into is..."Piercing the corporate veil". It basically boils down to keep the business separate from personal stuff and don't co-mingle them. This will really only come into play if something goes South and you get sued. It's better to keep everything separate from the beginning to minimize risk. | |||
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| Member |
Interesting that a CPA would threaten to fire a client over an agressive investment. I’m sure he’s protecting his ass and saving mental anguish for when it goes sideways and client wants the CPA to fix it. At the end of the day he’s likely correct and there is probably more negatives than positives doesn’t mean it’s illegal just a lot of squeeze for the expensive juice if paying 25% tax penalty just to get the working capital. | |||
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| Team Apathy |
Thank you. I'll talk to the one lawyer I know (the full time cop) and see if he has the name of someone local who would be right for this consulting.
This is great info, not a negative nancy at all. Any house purchased for purposed of rental would not be in CA but rather where we end up, so the numbers you pulled out of air may not apply, but I appreciate how the philosophy does, and it is helpful. The ONLY potential RE we might own to rent in CA is our current residence. When we go we'll owe maybe 120 on a house that'll likely sell for at least 450. My neighbor, directly next door, is a rental that is virtually the same to ours down to the floorplan. They get $2500 easy right now. So off the bat looking at real rents being paid vs my mortage, we can "make" $700/month before saving some for maintenance/emergency costs. That IS a significant chunk.... But doing that means we don't have all that escrow available to buy the next house... PLUS it means we keep a legal and financial tie to CA... things that mostly seem wise to terminate... especially as we feel there is no chance of living here again once we leave. Thanks again for the info... it is good to have and helps think through the scenario as it approaches, rather rapidly. At the end of the day I think I value the security that using the equity in our current house to purchase the next, hopefully without a mortgage, will bring. That and not having to deal with CA taxes and such to maintain a rental property here. | |||
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| Ammoholic |
There is attraction in this. As other have said, CA is very aggressive in chasing ever last dollar that they can get their grubbies on. A friend who moved to Wyoming and 1031’d out of CA investment property into WY investment property said that CA was somehow after that deferred gain. I don’t remember if they (the CA commies) were try to get paid on sale of the next property or what, but it was a big headache dealing with CA. A clean break seems like a beautiful dream… | |||
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| Member |
Happy to offer advice on the financial side. one more thing to think about is managing the potential up to 500k free gain of cash that I think will stay with Trump but you know the commies hate any tax free giveaway. If you today could sell and walk with 300k+, how long will it take you to work to save that much after taxes ? It would have taken me a decade to save the almost 500k free gain I made on my CA sale. We have saved and grown half of it and put half down on our purchase here in FL. I have been discussing a similar idea with my parents. They have a free and clear rental in San Jose, inherited from my grandparents so the taxes are prop 13 protected from 50+ years ago and negligible. Net value of the house is 1MM to 1.3MM the rental income vs. value are way upside down. I have tried to explain to my mom that they could sell this house that is at best bringing in like 3k a month net (60 year old 3 bed house has more maintenance than much newer) and pay cash via 1031 for 4-5 rental houses in TX or FL where me and my bro live and push that up to like 10-12k a month in rents even if professionally managed as they re in their 80's or 3 rentals and a family beach condo. Then sell their primary in San Jose and pocket their 500k and pay some tax and move to a free state near their kids and grandkids. but they are not having it. a 3 bedroom next door to my mother in law a mile from me worth maybe 300-325k just rented for 2500. even with higher taxes and insurance costs. I get the idea of leaving cash on the table. Our neighbors sold the next year after us. Same original floorplan, but legally increased 200 sq ft. a bit nicer remodel but sold for nearly 500k more than our sale. they walked with a mint and paid cash for a palace in TX and I'm sure they have a LOT left over and even may have owed some tax in excess of the 500k. I don't regret my sale and leaving CA though. SLOSIG: My CPA implored me to get out before June 30. so we were only residents in the state for less than 180 days and FL residents for the majority of the year. still had to file a return in CA that year but CPA insisted so I'm sure it helped some how. We also had done some research and you can un-register your cars and state DL in CA. I also changed my main address to FL with work as well. I could fully document that I was done with CA before June 30. I too had heard horror stories of financially broke goons in Sacramento trying to claw back folks who had left | |||
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| Shit don't mean shit |
I had the conversation with the CPA back in 2018 or so, so the details are a little fuzzy. I did some quick Googling and I think his hangup was limitation on "self dealing". Specifically #4 in the below. He said it was very easy to get tripped up, and the consequences/penalties from the IRS were pretty severe. IRA Real Estate Pitfalls Examples of prohibited transactions include: 1. Selling property to or buying property from your IRA. 2. Using IRA funds to purchase a vacation home or a property you intend to live in. 3. Renting IRA-owned property to yourself, your family members, or certain business entities. 4. Personally providing services (such as property management or repairs) to your IRA-owned property. | |||
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| Member |
Yeah the self dealing aspect comes up with #4. Putting more money into a rental that’s not from the IRA gets into the disallows contributions. For those playing the home game, I am specifically referring to the legal difference between buying property inside the IRA Vs. taking money out of the IRA and then buying a property with non IRA taxable cash. Fun fact. It’s pretty well known that Peter Thiel the billionaire owns a huge portion of his venture capital assets inside his ROTH IRA. There’s been articles written over the years about it and he’s admitted that someone years ago told him to venture invest in his ROTH so he did and no many of his billions are now tax free. Did probably had the biggest Roth IRA ever based on his ability to maximise the tax law as written. Don’t hate the player hate the game ! | |||
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| Team Apathy |
So let us kick this ball around, if you'll humor me: Let us eliminate from the equation my house in CA by assuming we sell it and turn around and buy a house, free and clear, wherever we move to. No mortage, just insurance and taxes annually. For the sake of ease, let's also say there is no money leftover, and no money out of pocket. Nice and clean. Further context: pension sufficient for all living expenses plus a enough to live an acceptable to us lifestyle. That leaves us with the 457 deferred comp account to use for additional income/wealth building for the kids once my wife and I are gone... Would you rather use the entirity of the fund to buy one property free and clear so all rent paid is "proft"... OR Use a portion of the account to purchase 1 property, establishing the LLC and bank account with enough money to pay 12 months mortgage plus a realistic emergency fund, leaving a good chunk in the 457 to continue growing (albiet with no more possible deposits) OR Use the entire 457 account to purchase multiple properties via mortgage as in option 2... but the account being totally drained and closed?  | |||
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| Member |
You gonna hate this, but It depends. Depends on the rental unit you want to buy. Every one is unique. Depends on how much you pull out of the 457. Do you pull x amount and that kicks you up into another tax bracket ? Paying 20% + tax to be able to buy a single digit maybe small 2 digit cap rate investment (tax savings aside) im not loving that. Multi units 2-4 or 5+ apartment would also be an option and NNN commercial as noted above as well. I assume you are open to those as well ? If you really love the idea of real estate there are also REITs you can buy. Both as an ETF and also as a structured investment both as a taxable investment and inside an IRA. Can I ask why you want to blow up your Ira pay a quarter of it in tax to buy a single asset ? I would look at just rolling most of that 457 into an IRA at Schwab, fidelity, vanguard etc and assembling a very well diversified portfolio. Leaving maybe50 or 100k in the 457 for possible future Real estate purchase. Inside the rollover IRA you can buy literally anything vs the 457 and likely have serious limitations on what you can buy. | |||
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| Member |
My wife and I have two rental properties. She is the financial wiz. She has separate accounts for EVERYTHING! I don't go to the bank without messing around with at least two accounts. Sometimes four. Like I said: she's the wiz, so I can't tell you how it's a good thing, but it works well for her. | |||
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| Team Apathy |
I don't really know what I want, right now... I'm exploring ways to create some revenue in the next stage of life while potentially also doing some wealth building for my kids... When we leave here my income will go down substantially but we do expect to also have cost of living go down substantially... combine that with all the equity that can be applied to the next home and it all seems doable, in theory. If I could pull $50k out of my 457 account and utilize that to purchase a property of some sort that will turn a modest monthly profit, that seems like a good thing... at least potentially. Especially knowing that someday it'll be paid off and a valuable asset... It is safe to say I'm open to any option that makes sense... I'm trying to learn the options, at this point and figure out what is a legitimate option versus what might be a silly thought exercise, at best. For instance, we settle in Town X in State Y and have the house free and clear as previously discussed... and I find a duplex nearby that I think could be a good investment and I could either pull out enough to arrange a mortgage or I could buy it outright, what things are most important to consider? Pulling out the full amount obviously results in a significant loss to taxes, but would allow for recouping that sooner from rental income. However, I suspect there is more to consider... that rental income is also then taxed as income as opposed to just the profit if a mortgage is being maintained, right? What else is part of this equation? I know the details likely matter tremendously... as you said, 'it depends'.... I guess I'm trying to get a feeling on the factors that impact it so I can make a more educated decision when the time comes. | |||
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