real estate law Archives - ARTAEV AT LAW PLLC

You may have seen YouTube videos or advertisements touting the merits of the self-directed IRA (“SDIRA”) as a “magic” way to leverage your retirement accounts and outperform the stock market by investing in private companies, real estate, gold, and even cryptocurrency. SDIRAs are perfectly legal when done right and for the right reasons, but unfortunately there is nothing “magic” about them. Nor are they appropriate for everyone. They are a sophisticated investment tool for persons who want to diversify their retirement account holdings and invest in something other than the stock market or mutual funds. It also gives the beneficiary (or owner) direct control over the investments, rather than relying on a bank or investment firm like Merrill Lynch to choose what stocks to buy. An SDIRA can invest traditional securities like stocks and bonds, and also in rental properties, precious metals, and yes, even cryptocurrency.

As an IRA, the SDIRA enjoys certain tax benefits (similar to a traditional IRA or 401k). There is also a self-directed Roth option. Federal law has a complicated set of rules and restrictions for SDIRAs because of the potential for abuse by SDIRA owners, and the IRS field manual and policies contain detailed instructions regarding various schemes and situations to spot the prohibited transactions. Violating these rules has significant tax consequences – an illegal transaction effectively distributes all assets of your retirement account early, with retroactive capital gains liability and penalties.

It goes without saying that you should hire an experienced professional to advise you on the SDIRA structure. Not all attorneys and accountants are knowledgeable and experienced in this area, so make sure you are talking to the right person. While there is a lot to know about SDIRAs and books have been written on the subject, here are 5 essentials to know if you are thinking about taking control of your retirement investments.

1. An SDIRA is not a source of start-up capital for your small business. One common misconception is that an SDIRA can fund a transition from “corporate America” to “small business owner.” That is not the case – the IRS rules prohibit related-party transactions. For example, you cannot use the SDIRA to invest in a used-car dealership and then you work at the dealership and draw a salary, commissions, or some other compensation personally. Nor can you use the SDIRA to loan money to your business, even if the transaction is commercially reasonable, papered, and your business pays market interest on the loan.

2. An SDIRA cannot buy real property from you or your family, or for you or your family to live in or use. Another misconception is that since real estate is a common SDIRA investment, you can transfer your mortgage to the SDIRA and basically pay interest to your retirement account on your house. Or, that the SDIRA can invest in rental or vacation property that your kids can use during winter break. Self-dealing with the SDIRA is prohibited. You cannot sell property from your own self to the SDIRA. Nor can you personally benefit from the SDIRA’s ownership of property, such as for example staying at the property or letting your kids use it during vacation.

3. Using a corporate entity as a conduit for investing is a good idea, but it must be set up in the right way. A common structure for investing is to create an LLC or corporation for the SDIRA to own 100% – which then can then create its own bank account, own property as the LLC, and protect the SDIRA and its owner from liability. For example, if the investment is a rental property and a tenant is injured, the tenant would be limited to suing the LLC (and the property insurance would pay), instead of the entire IRA or the IRA owner personally. That is not to say that the IRA is somehow immune from bad investments, creditors, or losses. Rather, the IRA/LLC structure allows to compartmentalize and limit liability to certain assets. Another important thing about the LLC structure is that a normal operating agreement does not work for an LLC that will be owned by an SDIRA. Special provisions are necessary to comply with IRS rules, as well as certain restrictions that preclude prohibited transactions and self-dealing. The custodian for the SDIRA will likely require a review of such an operating agreement before creating an SDIRA.

4. A special SDIRA custodian needs to be involved to create and administer the SDIRA. Not all banks or investment companies handle SDIRAs. This is not because there is something illegal about them – rather, self-directed investments are more expensive to administer and require more direct oversight than a traditional mutual fund, index fund, stock, or bond investment. Special SDIRA custodians that meet certain federal criteria exist to serve as administrators for these accounts. Because of the higher involvement, they usually charge higher administrative fees. They also will require documents (like the operating agreement or corporate bylaws if you are using a corporate entity structure). Some may even require an opinion letter from an attorney or qualified financial advisor attesting to the legality of a structure before they open your account. And, to the frustration of some, the custodian cannot give financial or legal advice to their clients.

5. Even if you do everything right, you may still be audited or end up in tax court. The IRS has spent a lot of time and resources litigating SDIRA cases and structures. They have lost some cases and won others. The bottom line is that unless you want to invest tens of thousands of dollars into making precedent and trailblazing new law in the area, conservative investing is your best bet. Simple is better. The golden rule is this: passive investments are ok, active investments are prohibited. So long as you stick to a conservative investing approach, do not commingle personal and SDIRA business interests, and treat the SDIRA as an investment opportunity for your retirement account, you will be in good shape. However, there are no guarantees that you will not have to defend your structure in tax court, and the more entities, companies, and investors are involved, the higher the risk.

In sum, SDIRAs are out there and make it possible to leverage your retirement assets into self-directed investments. Real estate, privately-held businesses, precious metals, and even debt portfolios are all potential avenues to receive greater-than-market returns for your retirement account. Or, it is also a great way to lose your entire nest egg if you invest in the wrong venture. Even when making a prudent investment, it is critical to do it right and act only with the counsel of experienced attorneys, accountants, or financial advisors. This is not a simple area and is rife with potential pitfalls and hazards. Use caution.

More questions? Thinking about funding your retirement through an SDIRA? Contact Dan Artaev by email or call or text to set up your initial consultation.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal, investment, or tax advice. Every situation is different and faces its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

In 2018, Michigan citizens overwhelmingly approved Proposition 1 to legalize recreational marijuana. While medicinal marijuana has been legal in Michigan for several years now, the recreational marijuana law will certainly expand the availability of the drug across the state. But what does that mean for the Michigan business community?

Legalization will impact your business, even if your business has nothing to do with the burgeoning marijuana industry. Recently, there have been a number of publications that counsel owners on the proper way to handle marijuana in the workplace. For instance, more access to marijuana means you will need to revisit your drug policies and make sure everyone is aware of the rules. This impact is rather obvious – but there are other effects on your business that are not as intuitive, but just as important. These “hidden” impacts may surprise you.

For example, you might be surprised that legalization presents a whole host of unique issues when buying or selling real estate. Imagine you are a small auto parts manufacturer located in the city of Pontiac. One of your facilities is in an area that will be zoned for marijuana dispensaries. A weed entrepreneur approaches you and presents a buy-sell agreement offering a significant premium.

Warning – this is not like every other real estate buy-sell! Consult with your attorney and accountant to ensure that you are adequately protected. At a minimum, here are 4 fundamental questions to ask before signing off:

Do you have adequate assurances from the buyer before entering into the “due diligence” period? Perhaps the biggest variable related to the marijuana industry is regulatory approval. The prospective weed entrepreneur must obtain licenses and approvals on both the state and local levels before they can open up shop. There may be local zoning hurdles to overcome as well. The licensing process may take 6-8 months or longer. Accordingly, as a seller – how long are you willing to wait? What are the risks to your ongoing operations during the due diligence period? Is the buyer depositing an adequate earnest money deposit to bind you to the sale? Increased uncertainty may warrant a greater down payment or non-refundable deposit to compensate the seller.
Does the chosen title company handle marijuana-related transactions? Not all title companies will issue a policy where the transaction involved a marijuana-related business. Right now, this is more of a matter of policy rather than the law. However, right now, Westcor appears to be one of the few major insurers that will insure title in a marijuana business property sale. And even they have limits as to the amount of the policy. The worst thing that you can do is deceive your insurer on the nature of the buyer or fail to disclose this critical fact. Like any other kind of insurance, a misrepresentation will likely void any policy and may lead to conflict and even litigation down the road between the parties.
How are you getting your purchase price? You probably already know that federally-regulated banks (which is pretty much all of them) do not accept funds from marijuana-related businesses. This is because while marijuana may be legal under state law, it is still a Schedule-1 prohibited substance (like heroin or cocaine) on a federal level. Accordingly, do not expect the typical wire transaction to work. Rather, your buyer might bring a cashier’s check for a large amount to the closing. Maybe they even want to pay in cash. Be sure to address exactly how the purchase price will be paid well in advance of closing.
Are you violating any other lease or covenant? This is where it is especially critical to involve your attorney. Imagine a situation where you own a strip mall with several tenants and a marijuana business approaches you to either purchase or lease on the of the units. Did you know that selling or leasing to them might violate your leases with the other tenants? Frequently leases for a unit in a strip mall have a covenant that prohibits a landlord from leasing or selling a unit to an entity engaged in “illegal” activity. Again, marijuana is still “illegal” as a matter of federal law. Further, do you have a mortgage on the property? Does the mortgage prohibit “illegal” activity? Last thing that you want in an inadvertent default on either your other leases or to your bank under some obscure provision in a financing document.

Contact attorney Dan Artaev today at dan@artaevatlaw.com or by phone or text at (269) 930-0254.