Danny Johnson: So what are the other different things that people can take advantage of that maybe you see most people sort of miss or don’t take advantage of?
Craig Cody: So we talked about medical, we talked about the kids. If it is a flip, a trader business, you can do a retirement plan. Then people can do self-directed retirement plans and then they can deal with loaning money to other investors that are doing work in real estate and stuff like that. Meals and entertainment. Those are basic ones when it comes to a small business unless we get into big, big numbers where we have to kind of do a couple of other things that might work. But the typical person that’s a flipper, those are coming in and just keeping track of your expenses, you’d be surprised how many people actually don’t really track the expenses, what are they spending their money on then. Because just like every other business that’s out there, they’re spending money, they’re not documenting everything. They’re not keeping their receipts and then they try and reproduce things at the end of the year versus doing it on a regular basis.
Danny Johnson: That’s what I would do if I didn’t have my wife. She’s the one that keeps track of everything and gets mad at me when she sees the deductions in the bank account online and asks me what the heck that was for kind of thing. But yeah, she’s really good at keeping all that together. Let’s talk real quick about the IRA, the self-directed IRA kind of thing. Because I think there’s big benefits in this and I think a lot of people aren’t taking advantage of the benefits of doing this. So what are the limitations? Can you speak very much on the arm’s length transaction kind of stuff like what to watch out for, how much you can contribute, all that kind of stuff.
Craig Cody: Well, if you have a self-directed IRA, you can contribute the whole thing into let’s just say an LLC. So let’s just say then that LLC owns a piece of a property. But you have to make sure that you’re not doing any work yourself on that property because then it becomes an issue. So more often than not with real estate and self-directed IRAs, we’re seeing people that act as lenders inside the self-directed IRA and taking that money, investing that, self-directed is investing into an LLC that is then going ahead and purchasing a property. But they have no active involvement in that property because then you’d get into these rules and most people are not going to pass the test and they’re going to just knock the whole thing out.
Danny Johnson: So now you say active role, what exactly does that mean?
Craig Cody: That basically means you really can’t be doing that much. You can’t be doing any repairs, that kind of stuff. You really have to be out of it. We’re not talking about collecting a rent or anything like that but something that you pay somebody else to do is basically going to kick you out of the box when it comes to owning real estate inside your IRA. There are people out there that specialize in that and if you’re doing that, you really do want to work with somebody that specializes in that on the compliance side to make sure that you’re not doing anything that you shouldn’t be doing and jeopardize the standing of that IRA.
Danny Johnson: Right. So if you want to do a flip, what’s the best way? You can’t really use your funds in your IRA to do a flip for your own business yourself, right?
Craig Cody: Correct. Because you can’t do it to yourself or your family members basically. But you can do it with if you know somebody else that does flips maybe you could lend him money.
Danny Johnson: So you do the lending for the deals, for people that are not in your up and down lineal heritage or your family.
Craig Cody: Correct. I like to just stay away from all family members.
Danny Johnson: All family members?
Craig Cody: Be safe.
Danny Johnson: Because it’s like aunt and uncles or something and stuff like that is fine, right?
Craig Cody: You know what, I don’t know and I have to look at that one. I know brothers, sisters, parents and stuff like that, it’s not just worth getting into that headache.
Danny Johnson: Yeah. So you can build up a lot inside of that IRA doing that lending. Are there any kind of limitations on the interest rates that you can charge or anything like that?
Craig Cody: They would just be typical rules that are out there now. We see a lot where it’s 8 to 10 percent plus a piece of the gain. So that’s usually pretty secured by real estate. What I’ve seen, it all depends on the guy that’s doing the flip, what kind of track record he has. Obviously the better the track record, the lower the rates he’s going to pay and the lower the equity interest he’s going to give somebody. Now, whereas somebody starting new is going to have to give away more. That’s been my experience.
Danny Johnson: Have you seen anything from other investors doing things like maybe an IRA and using the IRA to maybe buy like an option to buy a property and that you’re not involved with also and then having that option, like not exercising the option and then having a payment to release that option off the property?
Craig Cody: I have never seen that.
Danny Johnson: I heard some things like that but I don’t know enough about it to really probably even ask the question correctly.
Craig Cody: I do about 10 days a year continuing education just on tax planning and I’ve never heard that one. So I’m not sure. Another way and it’s really not in your listeners where it’s somebody that’s buying a second or third home and they have all this money in the IRA and they want to take it out and use it as down payment and get crushed in taxes. We’ll recommend doing a distribution to your what’s called 72T which is a series of equal payments so it’s not big penalties so you’re kind of like now you get those interest expense and you get the income on your 401k or your IRA that you’re taking money out of, they kind of offset each other so it’s almost like a way of taking money out tax-free.
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