Roth Conversions to a Solo 401K to Offset Losses

Are you a self-employed real estate investor? If so, the solo 401K may be the best option for you. The solo 401K is an IRS-approved retirement plan that enables you to minimize your tax burden. Read on to learn more about how this tax strategy works and how you can offset losses with a solo 401K and Roth conversions.

What is a Solo 401k?

As mentioned, a solo 401K is an IRS-approved retirement plan. Also, the solo 401K is ideal for self-employed business owners or business owners with one other employee, usually their spouse.

This retirement plan allows contributions of up to $60,000 each year.

If you want to learn more about the solo 401K and its many benefits, read our informative guide: Solo 401K vs. Self-Directed IRA: Which Is Better For You?

What is a Roth IRA conversion?

A conversion is a taxable movement of cash, real estate, or other assets from a Roth IRA to a Solo 401K.

When you convert from a Roth IRA to a solo 401K, there's a tradeoff. You will face a tax bill, possibly a big one, due to the conversion. If you decide to convert a portion of your Roth IRA conversions into a Solo 401K, you will pay taxes on the money you convert.

However, you'll be able to secure tax-free withdrawals as well as several other benefits, including no required minimum distributions, in the future. With proper tax planning, you may even be able to mitigate the tax bill from the conversion.

All in all, you pay taxes on the money you convert to secure tax-free withdrawals and several other benefits. One of the most significant benefits is that you will no longer have the required minimum distributions in the future.

Why are Roth conversions a popular tax strategy?

Roth conversions remain popular as many taxpayers fear that tax rates will only increase in the next few years. A Roth conversion enables you to convert now at lower tax rates, let your account grow, and let you make a tax-free withdrawal over the life of your retirement!

How is a solo 401K different from a traditional IRA or 401(k)?

Remember, if you have a traditional IRA or 401K, that money grows tax-deferred, but you pay tax on the distributions as you withdraw the funds at retirement.

The tax rate might be much higher when you retire. That means you would potentially lose more money to taxes each time you make a withdrawal.

Another thing to remember is that once you reach age 72, you must withdraw a certain amount of money each year, or the "required minimum distribution."

How can I offset losses with a Roth conversion?

One of the ways to mitigate the tax impact of the conversion is for a business owner to offset net operating losses (NOL). The income generated by a Roth conversion may offset the NOL, and the business owner may not incur any additional tax liability. Additionally, there is no limit to the amount of income that an NOL can offset.

What is a net operating loss?

Generally, a net operating loss (NOL) is an excess of deductions over income from the operation of a business. These deductions are expenses from the operation of a business.

For individuals, an NOL may also be attributable to casualty losses. A casualty loss occurs from the destruction or loss of your (taxpayer's) personal property. The casualty loss is a single, sudden event.

For instances of theft, you will need to prove that someone stole the property.

Example of how you would offset losses with a solo 401k

First, a disclaimer: these calculations can be complex, and investors should consult with a tax professional or financial advisor to decide the best strategy for them.

Imagine you're a sole proprietor who has a traditional IRA for self-employed individuals worth $300,000.
Your business experienced losses totaling $170,000 this year.
Your spouse's annual income was $75,000.
Both of you also reported $5,000 in income from interest and dividends, bringing your total income to $80,000.

The following example illustrates the calculation.

INCOME

Spouse’s wages
$75,000

Interest and dividends
5,000

Total income
80,000

DEDUCTIONS

Net business losses
(itemized deduction and personal exemptions not allowed in net operating calculation)
(170,000)

NOL for tax year
(90,000)

Income from Roth IRA conversion
90,000

Net taxable income
0

This example is for illustrative purposes only.

In this case, the couple may decide to convert $90,000 from the IRA. Then they can use that $90,000 to offset the loss and possibly avoid generating any tax consequences.

If you want to learn more about how the solo 401K lowers your tax burden, read Self-Directed Solo 401K: How to Avoid Tax Penalties.

Here's The Bottom Line

The solo 401K is probably right for you if you are self-employed. You need to decide if it's the right time for you to convert money in your Roth IRA to a Solo 401K.

If you do decide on a conversion, remember the tax bill upfront secures your freedom from "required minimum distributions." Also, you may be able to offset your losses with a solo 401K.

To learn more about this powerful tax savings strategy and others that you can use to keep more of your earnings, book a tax consultation by taking our tax quiz. The information you provide will enable us to have a productive discussion the first time that we speak.

Wyoming Statutory Trust vs. Delaware Statutory Trust

Asset protection isn't easy, especially if you are a California-based real estate investor. The good news for you is that LLCs aren't your only option. A Wyoming Statutory Trust, for example.

Using LLCs is a last resort for the California investor when looking for comprehensive asset protection. The $800 per year franchise taxes probably make a non-starter for you as you seek to compartmentalize every asset you own.

Does this sound like you?

The truth is that you don't need LLCs for protection in California. Also, you can use trusts that function just like traditional LLCs and Series LLCs. That's important as a real estate investor because these trusts provide:

protection
anonymity of ownership
relief from the California franchise tax

To protect real estate investors like yourself, you might consider reliable and proven options, like the Wyoming Statutory Trust and the Delaware Statutory Trust.

Read on so you can evaluate the Wyoming vs. Delaware Statutory Trust, then decide which one is right for you.

Wyoming Statutory Trust: A Unique Tool for Savvy Investors

The Wyoming Statutory Trust and Missouri Statutory Trust function like LLCs, but they are trusts.

If you use the Wyoming Statutory trust for protection, you can:

create an individual trust for every single property that you own
they are individually asset protected just as if you held them in an LLC

Since you create these trusts with anonymity through the use of a nominee trustee, you can anonymously own both:

your trust
the underlying asset(s)

We recommend using an attorney to create the Wyoming Statutory Trust. Your attorney should also serve as the nominee trustee to ensure your anonymity. Your attorney protects you and your trust with attorney/client privilege as a trustee.

Valuable Evaluation of Pros and Cons

The Wyoming Trust may be the right trust for you if you have fewer properties or have no plans to grow.

The upsides to the Wyoming Statutory Trust include:

they are inexpensive
provide effective protection

Wyoming privacy laws do not require the registration of trust agreements. That means privacy about you, your family, assets, and your estate plan.

You should be aware of the limitations of the Wyoming Statutory Trust. The main issue with the Wyoming trust is the complexity it adds to scalability. It may turn out that this trust proves too complex and expensive to provide the proper protection for you.

The first is management. Management of each trust requires:

its bank account
set of accounting books
dedicated attention to each trust

You would have a multitude of entities that may each require their tax reporting and filing. The amount of reporting on the entities can be an operational nightmare as you grow.

The second limitation deals with scalability. As you scale, you will be financially responsible for:

costs of the creation of an additional trust
operational complexities of banking and accounting
tax preparation and filing costs

What follows is more information to help you decide on the merits of the Wyoming Statutory Trust vs. Delaware Statutory Trust.

Delaware Statutory Trust: Proven Asset Protection

The Delaware Statutory Trust functions like a Series LLC, but it is a trust. That means the Delaware Trust might be for you if you have multiple properties to protect and you have plans to grow your business.

The Delaware Trust allows you to:

create a single trust
produce an infinite number of free children for your trust
compartmentalize and own your company properties anonymously

An attorney is acting as nominee trustee and masks the actual ownership.

Promising Security from Delaware's Trust

The upside to the Delaware Statutory Trust includes:

infinite scalability for free,
streamlines your tax, bookkeeping, and banking into a single entity (the parent Delaware Statutory Trust)

The trust allows you to scale freely without additional operational complexity or tax filings.

Everything in your life should stay precisely the same as if you managed everything through a single entity that you wholly owned.

The primary downside is that the Delaware Statutory Trust cannot hold any active businesses such as typical commercial businesses, and you cannot "flip" your investments.

The limit on commercial businesses and the inability to "flip" properties may not fit your specific situation. Still, the Delaware Trust is a solid option in many investing cases.

We know the decision is an important one for you to make. Read our "Step-By-Step Statutory Trust Beginner's Guide" for more information.

The Bottom Line: Wyoming Statutory Trust vs. Delaware Statutory Trust

The Wyoming Statutory Trust is an excellent option if you have a single asset and don't plan on acquiring more.

If you are an investor with intentions to scale, then the additional upfront costs of a Delaware Statutory Trust will pay dividends in the long run.

You want to protect your assets and ensure your financial freedom. Let us help you! Register for FREE Royal Investing Group Mentoring on Wednesdays at 12:30 pm EST to learn more.

The Ultimate Estate Management Guide for Savvy REIs

Here is your ultimate guide to estate management and a list of things you should do to get started.

As a savvy real estate investor, you know that you don't have to be ultra-wealthy to need estate planning. Your estate includes everything you all own. Protecting your assets for future generations makes estate planning worthwhile.

Keep reading to learn how to protect your assets!

Basic Overview

Estate management, also called estate planning, is the action of picking who receives your estate and manages your responsibilities if you are dead or incapacitated. The process ensures your beneficiaries enjoy your estate with less tax burden.

Estate planning establishes a procedure that can align with your personal and financial goals. How do you want your assets divided if you die or are incapacitated?

If you want to learn more about estate planning benefits, check out our guide, Estate Planning for Real Estate Investors.

Here are three estate management tips to protect your financial future.

Estate Management Tip #1: Inventory All Your Assets

You have enough stuff to start estate planning. Once you take a closer look, you will realize how many assets you have. In general, you can have tangible assets and intangible assets.

Tangible assets include:

Automobiles, motorcycles, or boats
Collector's items
Home
Land
Personal possessions
Real estate

Intangible assets include:

Bonds, CDs, mutual funds, stocks
Life insurance policy
Money in your checking and savings account
Ownership in a business
Retirement accounts and plans

Once you know how large your estate is, you need to estimate its worth. You have options for assessing the price of your assets:

Option 1: Get an outside appraiser to determine their value.
Option 2: You estimate their value based on how your beneficiaries value them.

Either way, you choose to estimate the value of your assets, you will ensure that your heirs inherit your possessions equitably.

Estate Management Tip #2: Establish Your Legal Plan

Once you know what's in your estate and how much it's worth, you need to think about how to protect your family and assets once you're not in the picture.

As a real estate investor, you have more things to consider, and your estate management plan needs to include legal directives. A wise option for carrying out your directions is establishing a living trust.

A living trust might be right for you. A living trust allows you to designate which portion of your estate goes where. If you're incapacitated, your trustee takes over. But, how do you find a trustee for your living trust?

Finding a trustee can be tricky. At a minimum, you want your trustee to be someone who:

will make funeral arrangements;
inform your family and heirs of your estate plans;
determines how to allocate your assets

Read our article Finding A Trustee For Your Estate Plan to learn more about selecting the right trustee for you.

If you die, your trust assets transfer to your beneficiaries, and you get to skip the probate process.

Probate is a time-consuming and expensive court process that determines how to divvy up your estate. It's best to avoid court in these matters, so you might consider using a pour-over will in addition to a trust for the best protection.

A pour-over will is a standard will form stating that the assets not included in your trust should be moved into the trust and distributed via the living trust terms.

Read more about the benefits of establishing a living trust in our article Living Trust Versus A Will: What's The Benefits For Rei?

Estate Management Tip #3: Determine Your Beneficiaries

Whether you choose a will or trust to carry out your wishes, you will need to determine who receives your estate.

Follow these steps to ensure that your assets go to the right people:

Check your retirement and insurance accounts. Generally, retirement and insurance accounts have beneficiary documentation that you need to keep updated. These documents may carry more legal weight than a will.
Keep your forms updated. Over time, people forget the beneficiaries of past policies–that oversight can come back to haunt you. For instance, if your ex-spouse is a beneficiary on your retirement account, your current spouse gets nothing from that account.
No blanks allowed. Fill out every beneficiary form on all your assets and accounts. If the section is blank, it may trigger a date in probate court.
Name backups. If you forget to update forms before you die and one of your beneficiaries passes before you, your assets will go to your second-round pick.

Key Takeaways

Change is the only constant in life. As a result, your estate management plan needs to be flexible. To keep your assets protected, make sure to revisit your plan regularly and if you have a life circumstance change.

We went over the importance of inventorying your assets, estimating their value, establishing a legal plan, and determining your beneficiaries. If you follow our ultimate estate management guide, you will take a huge step toward protecting your assets.

To learn more, check out our Estate Planning hub. This page serves as a knowledge base on all things related to leaving your legacy.

Successfully Investing in Real Estate as a Married Couple

You've chosen a life partner and are married. You may be asking yourself, is it wise to make my spouse my business partner? The answer could be yes. You would want to be sure to have a game plan in place. Good communication would also be necessary to balance the commitments of your marriage and business. Real estate investing as a married couple can be a very rewarding and lucrative endeavor.

In this article, we discuss:

Benefits of owning a family business
Steps before starting a business with your spouse
Actions to determine how to run your business
Options for structuring your business
Tax considerations

Keep reading to develop a solid plan that safeguards your marriage and business.

Benefits of Real Estate Investing as a Married Couple

First, let's talk about why operating a business that involves real estate investing as a married couple is a good idea:

Shared goals
Peace mind
Reliability

You and your spouse will share financial goals in your business. For instance, there will not be interoffice politics to navigate, and you will both work to secure your financial freedom.

Working with someone you trust, like your spouse, there is also peace of mind. Since you trust your spouse, the business will benefit from your stability and commitment to your marriage and the company.

Before You Start Real Estate Investing as a Married Couple

Before you dive into a real estate business with your spouse, you should discuss:

How (or if) you will incorporate your business?
Who will be the owner of the business?
Who will manage the business?

After you answer these questions with your spouse, make sure to write your decisions down. Having these agreements in writing protects both of you in the event of:

Divorce
Death
Surrender of the business

No one wants to think about the bad things that can happen in a marriage, but those adverse events have ramifications for your business. That's why it's essential to have plans "just in case" different types of scenarios occur.

Options for Running Your Real Estate Investing Business as a Married Couple

In general, the IRS allows for four different types of business structures:

Sole proprietorship
Partnerships
Limited Liability Company (LLC)
Corporation

Did you decide that only one spouse will be an owner? You might choose to create a sole proprietorship or a single-member LLC.

Are both you and your spouse going to be owners? You will most likely choose either a partnership, LLC, or a corporation.

Sole proprietorship

The following conditions must be met to be a sole proprietorship:

No other employees are active in the business, including but not limited to children and other relatives
Both spouses must materially participate in running the business

Taxes on a sole proprietorship, each spouse must file:

Schedule C reporting their share of the business' income
An additional (and separate) self-employment tax form
Employee spouse receives a paycheck with federal income tax and FICA withheld

Considerations for running your business as a sole proprietorship:

Easiest to establish
Generally, one spouse is an "employee," and the other is the "owner"
You and your spouse are 100% liable if the business fails
No protection from creditors

If you want more detailed information about this business structure, check out our article, "Can My Husband And I Own Our Business Together As A Sole Proprietorship?"

Partnership

Typically a partnership:

Organizes the company so that both you and your spouse share the profits and losses
Formed via a written agreement between two or more parties
Must register in all states where it does business
Both spouses are owners

Taxes on a partnership:

Only one form is involved, so it's a little easier to file taxes
Requires your to obtain a tax ID number
May be subject to state and federal regulations and tax
"Pass-through" income means that the owner's share of the business income goes on to your income tax return
Must pay self-employment tax

Considerations for running your business as a partnership:

Has opportunities for growth
Multiple types of partnerships (GP, LP, LLP) give your business flexibility

Read up on how a Limited Partnership can structure your real estate and other business deals in "Limited Partnership for Real Estate Investors" to see if this structure will work for you.

Limited Liability Corporation (LLC)

You will want to check your Secretary of State web page for more details, but in general, to form an LLC:

Name your business
Register with your state and pay a fee
Designate an agent
The agent will receive legal notices on behalf of you and your spouse
Both spouses are owners

Taxes on an LLC:

Taxes based on your salary and profit from business
If you set up as a sole proprietor and an employee, you will pay income and FICA
Partnership--LLC does not file taxes–you pay personally on income
If you set up as a C corporation, your corporation files taxes, and you file taxes
If you set an S corporation, LLC reports income sent to you as owners, you have to report the payment but do not pay self-employment tax

Considerations for running your business as an LLC:

Enables you and your spouse to share money and other resources
Protects you from being sued directly
Shields both you and your spouse's personal assets from lawsuits
Need management plan for "what if" scenarios

If you want to learn more about how LLCs protect you, your spouse, and your assets, read "What Are The Different LLC Types USe By Real Estate Investors?"

Corporation

This business structure is a separate entity from either your or your spouse. In general, a corporation:

Each spouse is a shareholder who divides the ownership shares of the company
Individuals have invested money in the business
Incorporation can be complicated
Payout in dividends based on level of investment

Taxes on a corporation:

If you set up as a C Corporation, your corporation files taxes, and you file taxes (double taxation)
If you set an S Corporation, LLC reports income but is sent to you as owners, you have to report the payment, but do not pay self-employment tax

Considerations for running your business as a corporation:

Taxation is more complex
S Corporations have "Pass-through" income which means that you must include your owner's share of the business income on your income tax return
You may qualify for a qualified joint venture

Final Thoughts

Real estate investing as a married couple can be a massive advantage for both of you. You can secure your financial future together and reduce your tax burden. However, it's essential to know how to maximize your savings as a real estate investor.

For more information about how to keep more of your hard-earned money, read the following articles:

Consider attending our FREE weekly group mentoring calls if you are just starting with real estate investing as a married couple. During these calls, we discuss topics such as: how to best structure your business, how to protect your assets, what tax savings you can take advantage of, and more. Join us for Royal Investing, Wednesdays at 12:30 p.m. EST by Registering Today.

The Rental Property Asset Protection Checklist

Keep potential lawsuits at bay by viewing the rental property asset protection checklist we have prepared for you. By doing so, you’ll be able to protect your assets without worry or distraction.

The following checklist recommends some protective measures you can take for your real estate investments, cash, other assets, and financial future:

Anonymous Land Trust
Setting up a Traditional LLC
Benefits of a Series LLC
Everyday situations to avoid ending up in court

The bottom line is that the best asset protection strategies stop lawsuits from happening. This list will help you decide how best to protect your assets.

Anonymous Land Trust for Rental Property Asset Protection

Anonymous Land Trusts are highly effective but lesser-known instruments that protect your privacy as a real estate investor.

One vital benefit that anonymous land trusts provide is that unknown ownership makes it harder to file a lawsuit against you.

Here are some frequently asked questions about a Land Trust:

What are the parts of a land trust?
They are vehicles to help savvy investors hold properties anonymously. An anonymous land trust has three components: a grantor, a trustee, and a beneficiary.

How does a land trust work?
When you decide to form a land trust with Royal Legal Solutions, we serve as your trustee and manage the trust. You are the beneficiary which means you (1) are not publicly identified and (2) can enjoy the profits from your property.

Read “Anonymous Land Trust for Real Estate Investors” and get more details to help you decide if this sound legal strategy is the right solution.

Setting Up a Traditional LLC

Limited Liability Companies (LLCs) legally separate you from your business.

Benefits of an LLC:

Guarantee of personal security
Simple to create, simple to manage
Relatively inexpensive

We want to provide accurate information so you can make a sound decision. To that end, here are the most common drawbacks to using a Limited Liability Company:

Puts “all your eggs in one basket”
Expensive tax preparation
Not replicable on its own

Read “Texas LLC for Real Estate Investors” for more information. Ultimately, LLCs are okay for one asset, but a Series LLC is better for multiple assets.

Benefits of Setting Up a Series LLC for Rental Property Asset Protection

Series LLCs, a “parent-child” structure that ensures protection for your assets. Here are the steps of the structure:

Set up a Series LLC (this is the parent)
Create individual LLCs (these are the “child”)

Benefits of a Series LLC:

“Child” LLCs have no additional filing
Further minimizes your liability
Ideal for investors with multiple properties or types of assets

You might be having questions about a Series LLC. Here are the most common questions we encounter about this legal structure.

How does the Series LLC protect my assets?
Each asset is isolated from others.

How can I minimize my losses in a critical case?
The Series LLC structures your business in such a way that only one asset is at risk in any given lawsuit.

Why would I need anonymity?
If people think you own nothing, they have no motivation to sue you. Thus, the anonymity of the Series LLC shields you from lawsuits.

Read “Series LLC for Real Estate investors” to get a detailed account of how a Series LLC might benefit you. Overall, Series LLCs primarily help real estate investors with multiple properties or types of assets.

Avoid These Common Situations to Stay Out of Court

When you sign a lease with a tenant, you begin a legally enforceable contract that covers the terms of their tenancy.

Your tenant pays rent, and you conduct repairs and maintenance in exchange. When your tenant feels like they have no options, they might seek to sue you.

You don’t want to end up in a lawsuit, so make sure to:

Keep the living environment habitable
Refund security deposits when the tenant has fulfilled their obligation
Keep the property safe and injury-free
Respect your tenants’ privacy
Follow eviction laws
Adhere to the Federal Fair Housing Act
Keep following state tenant laws
Avoid credit abuse

Use this checklist as a guide to help you decide what type of asset protection is right for you. No matter what level of real estate investor you are, you need to protect your assets. Make sure to apply the lessons from this checklist today.

Bottom Line: Protect Your Assets

As you continue along your real estate investing journey, ensure that you protect your assets with the right financial strategies and business structures in place. Learn how to get bullet-proof asset protection with our FREE, 5-part educational series for savvy real estate investors.

Request your access to the Royal Academy Asset Protection Vault today!

Starting Your Real Estate Investing Journey

Are you currently considering starting a real estate investing journey?

Real estate investing makes people wealthy. Of the 400 richest Americans, 24 made their money on real estate investments. At one time, they were like you--starting as a novice real estate investing professional. Below we have compiled some of the opportunities and challenges you may encounter so that you can hit the ground running.

Here are the things that you should know as a beginner on your real estate investing journey.

The First Step Is Forming A Series LLC

Real estate investing is not without risk. As a result, before you take this monumental step towards securing your financial freedom, you need to have rock-solid legal and financial structures in place. One way to ensure that you have the proper legal and economic systems is to create a Series LLC.

Take a moment to discover how Royal Legal Solutions can protect you with a Series LLC. This business structure will safeguard your investment and livelihood.

Real Estate Investing Journey Fundamentals

You must be financially prepared to start investing in real estate. Read on for six tips to start on a solid foundation.

1. Reduce Your Debt for Maximum Advantage

As a new real estate investor, carrying debt is not ideal. Adding to your current expenses such as student loans, medical bills, or paying for essentials may put you in a challenging position. Ideally, you will want to have some money in savings to use as a safety net.

2. How to Use a Simple Method For Increased Profit

Depending on your investing goals, you will have to decide whether it would be better to purchase with cash or finance your real estate investment.

One benefit of a cash purchase is that you start accruing positive monthly cash flow. On the other hand, financing may generate a higher return on your investment.

For instance, you use cash to buy a property for $100,000. After collecting rent, deducting taxes, and other operating costs, you might see about a 10% return on your investment. A 10% return equates to a cash flow of $10,000 per year.

Another option is to finance the property with a 20% ($20,000) down payment and an annual 3.5% mortgage rate. After paying taxes, operating costs, and additional interest, your earnings will be about $6500 per year.

The cash flow is lower with financing, but the return on investment is much higher at 32.5%

3. The Bottom Line on Mortgages

Primary residence mortgages and rental property mortgages are similar. However, there are some critical differences.

First, people default much more often on rental property loans. That makes sense because a borrower who runs into financial trouble is more likely to focus on their primary home mortgage first.

In general, the additional risk associated with rental property loans results in lenders charging higher interest rates.

Second, rental property mortgages come with more stringent underwriting standards. The lenders closely inspect your credit score, down payment, debt-to-income ratio, and cash on hand.

4. Beware High-Interest Rates

In 2021, the interest rate is relatively low for a conventional mortgage. You should know that the interest rate on investment properties is higher than a traditional loan.

When you decide to become a professional real estate investor, you need to secure a low monthly mortgage payment so that your monthly payment does not disproportionately eat into your profits.

5. Seek Real Opportunities to Generate Wealth

You should set a goal of a 10% return on your investment. When developing your expectations, you need to consider the following factors:

Regular maintenance and repairs will cost about 1% of the property value annually.
Property taxes are, on average, 1.1% of the home value.
If you must pay HOA fees, they can range anywhere between $100 and $1,000 per month, depending on geography.
Unexpected costs like roof damage or significant plumbing issues require you to set aside around 25% of rental income for timely repairs.

An easy way to estimate your monthly operating expenses is to follow the 50% rule. Simply put, you need to figure that about 50% of your operating income will go to operating expenses.

For instance, if you charge $1500 rent, you should expect to pay $750 in total expenses.

6. Landlord Insurance: Important and Useful Security

It would be best if you protected yourself with landlord insurance. Landlord insurance covers property damage, lost rental income, and liability protection from a tenant or visitor injury on your property.

Profitable Tips to Give You the Edge

Surging Locations Are Key To Success

You will want to avoid making a real estate investment in a dying area that may become a burden to you.

Instead, find a city or location where the population is growing or where a community revitalization plan is in place. A revitalization plan in a community increases the likelihood of employment, living wage jobs, and tenants.

Here are some things to look out for in profitable rental properties:

Low property tax
Good school district
Growing job market
Local restaurants
Public transportation
Shopping

Each of these factors will likely contribute to a healthy set of potential renters.

Be Shrewd With Rental Properties

Remember, the more expensive the home means higher operating expenses. An excellent place to start your real estate investing is finding a $150,000 to $200,000 home in a growing neighborhood.

You want to follow the Goldilocks Rule, "You are looking for something just right." Don't buy the best house in the neighborhood for sale, nor should you invest in the worst.

Beginners Should Avoid Distressed Properties

Part of finding a home that is just right is avoiding a fixer-upper. You might think you are getting a bargain and can flip a distressed property into a cash cow. If you are only beginning your real estate investing journey, that's a monumentally bad idea.

The price of building materials and a labor shortage make the house flipping industry an expensive and dangerous endeavor--ask Zillow.

The Hidden Benefits of Property Managers

Should you hire a manager or go at it alone?

Using a property manager is a significant consideration for you as an investor. As a landlord, you would be involved with vetting tenants, coordinating maintenance, collecting rents, and resolving disputes. You may prefer to offload those duties to someone else so you can focus on activities that grow your business.

Hiring a property manager can be a tough decision because it will cost a portion of your operating income. The cost can be a considerable chunk of your profits, typically between 8% and 12%.

That said, an experienced property manager might still be worth it to you. Realistically, a property manager eases the burden of being a landlord and brings lots of experience and expertise to the table.

Most property managers:

Collect rent
Contract maintenance and repairs
Handle complaints, late rents, and evictions
Market your property
Pay property tax, utilities, and insurance on your behalf
Price the rent
Show tenants your property
Screen potential tenants

Consider the following to determine if a property manager is worth the cost:

Am I willing to deal with tenants?
Do I have time to manage this property?
Do I have to have complete control?
How far away is this rental property from me?

Pros v. Cons of Starting a Real Estate Investing Journey

As with any financial decision, you must decide if the benefits outweigh the costs. Real estate investing is a great way to increase your wealth, but it is not without risk.

See the table below to help you decide whether starting a real estate investing journey is right for you.

Real Estate Investing Journey Recap

First, one way to mitigate some of the risks you will encounter in real estate investing involves forming an LLC. Read more to learn about the benefits of using a Series LLC to protect your assets.

Second, make sure your finances are in order before you embark on your real estate investing journey. You can reduce your debt which will help lower your debt-to-income ratio and improve your credit score. A higher credit score means better rates and terms and more cash in your pocket.

Third, find affordable housing in growing areas. Remember, the key is to get affordable housing without buying a money pit that needs a lot of work.

Fourth, consider hiring a property manager--the hassle and time saved might be worth it to you!

Before you decide to begin real estate investing, ensure that you have the appropriate asset protection and business structures in place. To discover how you can achieve bulletproof asset protection, check out our FREE, 5-part educational series for real estate investors. Request your access to the Royal Academy Asset Protection Vault today!

8 Creative Ways to Fund a Real Estate Investing Startup

If you're considering a real estate investing startup, you may be wondering where you can get the capital to fund your first deal. Read below to find out about some of the many options available to you.

1. Conventional Loan

The most frequent type of mortgage is a conventional loan. You make a down payment, and the bank gives you the rest of the money in exchange for a lien on the property secured by a mortgage.

Investors who put down at least a 20% payment are not required to carry private mortgage insurance (PMI). PMI is a form of mortgage insurance that you may be required to pay for if you have a regular loan. PMI protects the lender if you stop making payments on your loan.

Not every real estate investing startup has the capital to go this route for their first deal.

2. Federal Housing Authority Loans

The Federal Housing Authority loan is a government-sponsored loan that encourages individuals to buy houses by allowing borrowers to make a down payment of 3.5%.

Because the FHA assumes some of the financial risks by ensuring the cost of the loan if the borrower fails to make payments, more borrowers can qualify for an FHA loan than a standard loan, and the lender can offer a competitive interest rate.

FHA loans come with some drawbacks for funding your real estate investing startup:

You have to live on the property for at least one year
You must pay mortgage insurance over the life of the loan
Strict appraisal requirements for these loans prevent buying fixer-uppers

3. Private Lenders

A private lender is a person or entity that uses its own money to finance investments such as real estate and earns interest payments on the loan. Private lenders operate independently of banks or other financial institutions, and they deal directly with the borrower.

Here are some tips for finding private money lenders:

Conduct a thorough online search for mortgage loan alternatives
Build your network:
- Join local real estate investor meet-up groups
- Join and participate in LinkedIn
- Attend local industry events

4. Venture Capital

Look for venture capital, aka angel investors. A real estate angel investor may help you finance the purchase of a property.

If an angel investor has faith in the proposed investment property's chances of success, they will supply the money required to finalize the transaction. Sometimes, angel investors will join forces to form angel groups to participate in more significant transactions.

Where can you find real estate angel investors?

Most people who have secured private investor angel capital claim that networking is the most effective method for locating real estate angel investors.

You'll need a polished presentation to approach potential investors. It doesn't matter how excellent you are or how helpful your services are if you can't communicate them effectively through a good pitch. A successful and effective sales pitch demonstrates your enthusiasm, proves that you know what you're doing, and answers questions. Practice your presentation to improve your public speaking and sales skills so that when the opportunity arises, you're prepared.

5. Crowdfunding A Real Estate Investing Startup

Real estate crowdfunding is a relatively new approach to investing in real estate.

Real estate investment platforms (also known as crowdfunding sites) link individual investors with real estate developers and other real estate professionals who want exposure to the sector without dealing with buying, funding, and managing properties.

Here is a list of real estate crowdfunding sites that may be suitable for your needs:

6. Hard Money

Hard money is similar to private capital, but it comes from a hard-money lender instead of a person. The term "hard money" is appropriate because the lenders secure the loan using the hard asset (the property).

Individuals use hard-money, short-term loans to purchase a property they intend on renovating and re-selling.

Typically, you'll get hard money to cover 70–80% of the property's purchase price before rehabilitation. So the lenders must be confident that the property is worth more than the loan and their cost to sell it if you default.

Hard-money lenders usually charge high-interest rates and include other expenses such as loan origination fees.

7. Home Equity Line of Credit (HELOC)

If you already own a house and have some equity tied up in it, you may use a home equity line of credit or HELOC.

Let's assume that you've spent ten years in your primary home paying down the mortgage and reaping the benefits of appreciation.

Your home appraises for $300,000, and your mortgage payoff amount is $150,000. Your equity in the property is $150,00 ($300,00 appraisal - $150,000 mortgage payoff).

You may use a HELOC to borrow against the equity in your home and use the $150,000 to purchase an investment property.

8. Fund Your Real Estate Investing Startup With a Self-Directed IRA

Many of our clients invest in real estate through their Self-Directed IRAs because there are several advantages, tax perks, and little-known secrets that only real estate investors with a Self-Directed IRA can utilize.

Your profits are tax-free.
There is no time limit for keeping the property.
You can earn a greater return on your capital.

Do you want to learn more about Self-Directed IRAs and how they help you earn more from your real estate investment? Read our comprehensive guide on Self-Directed IRAs.

Critical Takeaways For Funding Your Real Estate Investing Startup

Traditional financing, such as a conventional loan, is only one of many options you could explore.
Crowdfunding and angel investors are rising alternatives for funding real estate investments.
You can use a HELOC on your primary residence to purchase and rehab an investment property.
You could begin investing in real estate by moving your 401(k) assets into a self-directed individual retirement account (SDIRA).

Royal Legal Solutions is here to help you along your real estate investing journey.

Before you make significant investments, ensure that your legal and financial company structures are in place.
Take our financial freedom quiz to engage our legal team for additional wealth-building insights.

Preserve Anonymity by Using a Land Trust to Buy and Sell Real Estate

Do you want to buy or sell real estate properties? Using a land trust is a good idea because it protects your interests. A land trust is a legal entity that holds a title to real property in a name other than its own.

Owning real estate is an excellent way to make money. But the taxes and the fees you have to pay for it are often high. You can avoid these costs by using something called title insurance. When you own more than one property, you may have to pay these fees repeatedly as time goes on. But there is a tool that can help you reduce that cost. Read more here to find out when the best time is to set up a land trust.

There are three primary kinds of land trusts, each with its structure and way of working. These include a real estate investment trust, a conservation trust, and a community trust.

A real estate investment trust is an organization that buys the property. The trustee, in this case, is a legal entity that works on behalf of the beneficiaries.
A conservation trust is a private, nonprofit organization that buys the property and builds easements to stop people from developing certain areas.
A community trust is a group of people who want to acquire low-cost housing. They buy the land and build the home, then sell it for a lower price.

Do you want to learn more about the hows and why of a land trust? Check out "The How, The Why, and The Basics of Land Trusts."

Remaining Anonymous Is One Of The Many Advantages

You might be worried about other people coming to your door to sell you something, or you don't want real estate investors contacting you--leveraging the anonymity of a land trust is ideal. You can put your property in someone else's hands.

In real estate, it can be hard to avoid sales calls from companies. To prevent this, you might want to remain anonymous so people won't find you. The trustee is not allowed to tell people your name unless a court says that they can. The anonymity will help you avoid people who might disrupt your day.

Your Property Is Protected From Liability

Being a real estate investor makes you an attractive target for lawsuits. People who want to litigate will know how much you paid for your properties and use that information to gauge your wealth. It may be that those people will use that publicly available information to take money from you by filing a lawsuit against you.

A land trust is an excellent way to keep people from finding out how much money you have. It is important to remember that a land trust will not protect you from every person, but it will help.

Prevent The Due-on-Sale Clause

When the lender chooses to sell the property, they can use the due-on-sale clause to collect the entire outstanding debt of a property holder. This clause might prevent you from making investments with the flexibility you require as a real estate investor. A land trust prevents you from having to pay the total amount due on sale.

However, this is not a rule for everyone. There are limits to it:

commercial property
properties with more than four residences

It's Simple To Transfer Property Ownership With A Land Trust

A land trust is when you give someone else your property. When both the grantor and beneficiary are still alive, then it is simpler to transfer. Some jurisdictions might use a land trust for tax reasons.

Should you need to change your company or break it down, it will be easier to put the land in the hands of a trust.

You Can Use A Land Trust To Sell Real Estate

There may come a time when you need to sell land held in a trust; the procedure will be the same as when selling a non-trust property. The only difference is that people will see the name of your trust instead of your given name.

When the time comes to sell your property, you need to study the trust agreement. You can sell assets of a trust if the trust agreement allows for the sale.

You will want to answer the following questions before selling with a land trust:

Do you have the legal right to sell this property?
What happens when a land trust sells real estate?

Do You Have The Legal Right To Sell This Property?

Sometimes there are many titleholders in a land trust, so it might be hard to sell all assets. The trustee will negotiate with other people in the trust, sometimes buying out someone else's share for an acceptable price.

However, people can't buy your property if they don't know who you are. In the case where the trust is only one person's property, then it doesn't matter, and you can sell off all your assets without anyone stopping you.

What Happens When A Land Trust Sells Real Estate?

Like any other real estate investor, a seller strives to achieve the highest possible price on each transaction.

The money is converted into a personal property trust when a transaction is completed. Then, the land is transferred from the trust to the new owner. It protects the funds for the beneficiaries while maintaining everything as it was before.

Final Thoughts

We hope this post has helped you to learn more about investing your money in land trusts. You have worked hard, and it is essential to keep your money safe. You can make sure that you keep your money safe and make a profit by investing in real estate through intelligent use of land trusts.

When you decide the time is right to use a land trust for your property investment, talk to a lawyer with experience with this kind of agreement. Finally, if you still have questions about land trusts, check out our detailed Land Trust FAQs.

Five Commonly Believed Land Trust Myths Dispelled

A land trust is a legal entity that is designed to protect the land from creditors. It does this by keeping land out of the owner's name and placing it in the land trust's name. Real estate investors have used these structures since the late 1800s when investors bought the land up left and right.

Savvy real estate investors created land trusts as an asset protection tool for wealthy landowners who were worried about losing their land due to lawsuits or other factors that could lead to bankruptcy. There are many misconceptions about these entities that people believe are true because they have repeatedly heard them—even though they aren't based on any facts!

In this article, we will explore five myths about land trusts and dispel them once and for all.

Myth #1: Land trusts are too expensive for real estate investors to use.

This is entirely false. While wealthy landowners have used land trusts in the past, there is no reason why real estate investors can't use land trusts today. Land trust registration fees are much lower than you might think!

People fail to understand that these trusts are not only for the wealthy landowner—this couldn't be further from the truth. Anyone can use a land trust to protect their land, no matter how much money they have in assets.

Do you have questions about setting up a land trust? Check out our article about the basics of land trusts. We answer the "how" and "why" of what you need to set one up to protect your assets.

Myth #2: Land trusts are a scam.

Land trusts have been around for over 100 years, and there is no evidence that they are a scam. They cannot be used for fraud or land grabs when land is being purchased. In addition, land trusts work if you buy with a spouse/partner.

Land trusts involving real estate are not always used by landowners alone. Many land trusts involve more than one landowner or even spouses/partners who must own the land together. The belief that only a single person can buy into a land trust is a persistent misconception that stems from the fact that some land trust providers don't allow multiple names on their forms.

This is easy to get around—write an addendum! Addendums are additional documents that can be used to modify an existing document such as a land trust. For instance, you could add information that would protect against tax liens or judgments in the land trust agreement itself.

There are multiple benefits to leveraging a land trust. We invite you to research those value-added benefits further here.

Myth #3: Land trusts are too tricky to set up.

Many land trust providers have excellent customer service, making it easy to get the land in your name, out of your name, and into a land trust.

An associated misunderstanding is that land trusts must be a specific size—some people believe that if your land doesn't meet a minimum requirement, land trusts won't shield it from creditors. That is not true either!

Maybe you have heard that land trust documents require a lot of paperwork and filings—false again! While it does take some time every year or two to update land trust documents, it's not nearly as strenuous or time-consuming as you might imagine.

Myth #4: Land trusts are only for large land purchases.

This isn't true! Many land trust providers have an option to choose which parcel of land you want to protect, so it's possible to register one on land parcels that range in size from one acre up to thousands of acres.

The misconception is that land trusts are only helpful for wealthy landowners—while the upper class initially created land trusts, anyone can use them today! They offer asset protection to real estate investors who want to keep their land protected from

Moreover, some people think that land trusts don't protect real estate assets from lawsuits or creditors—this myth stems from the fact that land trusts are not always public knowledge.

As a real estate investor, you can structure land trusts to ensure the landowner's name is never publicly available. This doesn't mean land trusts don't protect the land from lawsuits or creditors—they do!

Do you think that you may need to set up a land trust? Find out if you are eligible and can benefit from setting up a land trust.

Myth #5: Land trusts are only for land.

Another common misconception about land trusts is that they can only protect the land. This isn't the case at all! You can own almost anything under a land trust today. These structures have become more common in recent years, so the costs have gone down significantly.

Conclusion

In conclusion, land trusts are not scams or land grabs—they're fundamental, valuable tools that can be used to asset protect your land. They are not only for the ultra-wealthy but also for real estate investors.

They can help investors to protect the land from creditors, lawsuits, and other land problems. There are many myths about land trusts that can be dispelled with simple research!

Still, have questions? Check out our land trust FAQs for your answers.

How to Choose Which State to Register Your LLC In

You are taking the first step to financial freedom–you have started your own real estate investment business. After researching the next step, you've decided to form a Limited Liability Company (LLC). That's a good idea because an LLC provides some personal liability protection if your business is sued.

You care about protecting your assets. Do you want to make sure your real estate investing business is protected? Start with our investor quiz, and we'll help you find ways to protect your assets.

Your home state is the state in which you conduct your business. For example, if your real estate investment business is in Texas, you should form your LLC in Texas.

How do you know if you are "conducting business" in a state? Here is a list of things that characterize "conducting business" in a state and should influence your decision about where to form your LLC:

Most of your revenue is generated within the state
Physical presence in the state
Your business is physically in the state
Your employees (or you) work in the state

You can choose to form an LLC in another state, but then you have to register your LLC in your home state. This is problematic because you will:

Operate as a foreign LLC
Pay fees in your registered state
Pay fees in your home state

In most cases, your home state offers the cheapest and safest route for registering your LLC.

What's The Best State For A Single-Member LLC?

A single-member LLC is a type of incorporation that recognizes the LLC as having one owner. It has all the same benefits and drawbacks as a multiple-owner LLC.

The best state for forming a single-member LLC is Nevada. Nevada is the top choice for a single-member LLC because:

Privacy--there is no need to disclose the members of your LLC
No state taxes
Asset protection

The importance of anonymity for your LLC cannot be overstated, so Nevada (which provides total anonymity) might be the right choice for you.

One downside to incorporating in Nevada is the negative perception associated with the state. Nevada is stigmatized by the persistent belief that a business incorporated in the state but conducting business elsewhere is a front for organized crime.

What's The Best State For LLC Asset Protection?

Negative perceptions notwithstanding, Nevada is also the best state for LLC asset protection. The state's heightened asset protection dictates that your business liability is kept with the corporation.

In most other states, your LLC will protect against liability. These protections are not complete–some states provide avenues for liability to affect your assets if your corporation causes damages. Nevada does not.

However, Nevada does not require you to list your company's assets for the state. Coupled with the robust privacy laws, incorporating in Nevada provides the best protection to your privacy and assets.

What's The Best State To Start a Business For Tax Purposes?

Delaware, Nevada, and Wyoming are business-friendly states. If you decide to incorporate in one of those three states, you have the opportunity to benefit from the states' tax benefits. You don't have to live nor operate your business in Delaware, Nevada, or Wyoming to reap the rewards.

Here are some reasons why you may want to incorporate in one of the three business-friendly states:

Business-friendly rules
Ironclad privacy laws
Efficient and business keen court systems

You may wish to have the optimal tax situation but loathe the idea of relocation. It might be a good idea to incorporate in Delaware, Nevada, or Wyoming if that's you.

Why Do Some People Say Delaware Is The Best State To Form An LLC?

A little more than half of all Fortune 500 and publicly traded companies are incorporated in Delaware. They can't all be wrong!

There are myriad benefits to incorporating in Delaware, especially if you are a large organization.

Delaware offers lots of flexibility. That flexibility makes it easier for larger companies to set up shop. For example, if your business is large enough to need a board of directors and officers, those officers do not need to live in Delaware to work for your business.

Delaware has strong privacy laws. As an LLC, you don't need to provide many details about the members of your business for incorporation.

Delaware has efficient courts. Judges, not juries, decide corporate legal issues. Your judge will be an expert in corporate law, and the process is fair, objective, and efficient.

Delaware has attractive tax benefits. For instance, you do not have to pay state income tax if you incorporate in Delaware, but your business is physically located elsewhere.

Delaware is fantastic for big businesses, but smaller corporations might not get the same mileage out of those benefits. The cost and hassle of incorporating in Delaware might not be worth it for smaller companies.

What's The Cheapest LLC State?

Wyoming is the cheapest state to form an LLC. The benefits include:

No corporate income tax
No personal income tax
Strong privacy laws

Key Takeaways

An LLC provides some but not complete asset protection.

In general, it is best to incorporate it in your home state.

If certain conditions apply, Delaware, Nevada, or Wyoming may be your best bet for incorporation.

How to Avoid Getting Sued When You’re a Real Estate Investor

Getting sued is every real estate investor’s worst nightmare.

Running your own real estate business can be rewarding, but it’s also inherently risky. You put your money, time, and dreams on the line to make it a success, but sometimes things don’t go as planned.

Any number of things can happen, and it’s nearly impossible to prepare for all of them. Still, if your portfolio isn’t protected from some of the most common pitfalls, everything from your real estate assets to your personal belongings could be on the line.

Getting sued can wipe out everything you’ve worked hard to create. So what can you do to protect your business from the inevitable lawsuit?

In this article, we lay out some basic asset protection tips: from getting flood insurance to setting up Series LLCs to more advanced incorporation strategies. It’s important to plan for the worst before it happens because almost every experienced real estate investor will -- at some point in their careers -- deal with some sort of legal issue.

Key Points About Basic Asset Protection

In this podcast with BiggerPockets, Royal Legal Solutions’ own Scott Smith outlined some of the most important steps you need to take in order to avoid getting sued.

Talk to Your Lawyer

This one may seem obvious, but one of the first and most important things that Scott says in the show is this: There’s “no one blanket piece of advice that applies to everybody… Everybody’s business is different. Everybody’s situation is different.” If you don’t invest your time and money into some sort of individual asset protection -- beyond reading an article on the internet -- you’re definitely not doing all you could to avoid a lawsuit. While we might be able to give you some tips that likely apply to your business, it’s still important to get a more personal look.

It’s Just Like Flood and Fire Insurance (If You Don’t Have Those, Get Them)

Obviously, floods don’t happen all the time. There’s no guarantee that your property will have a flood, even if it’s in a flood zone. Still, that danger exists -- and you likely have some form of insurance to protect against it (if you don’t, get it). The same thing is true for fire insurance: fires might happen, but there’s no guarantee. In case that they do, you know you want to be protected. Finally, lawsuits work the same way. A lawsuit might happen—or it might not—but you still want to be protected in the off-chance that it does.

When You Get Sued, You’re on Your Own

What happens if someone sues your LLC?

“You don’t really have any friends once you start getting sued,” Scott says in the podcast. When your friends and associates hear that you’re getting sued, it’s very likely that they’ll consult their attorneys for advice on what to do, and it’s very likely their attorneys will tell them to distance themselves from the situation as much as possible to avoid any additional scrutiny.

More Strategies and Tips on How to Protect Your Assets

Avoid putting your properties in your own name. When it comes to asset protection, this is a big deal. In fact, Scott said it’s one of the first things he’ll ask real estate investors at conferences and business events. He puts it this way: “what rich people do is rich people don’t own things. What rich people do is they control things.” You don’t have to keep the property in your name, because that indicates ownership to any outsider who might be interested in pursuing a lawsuit just because they know that you have a lot of money.

Use a Series LLC to isolate your assets. This falls under a similar category as the point above. It’s possible to separate your real estate assets from your personal assets, creating an additional layer of security and making lawsuits very difficult. One way you can do this is by holding the properties in individual LLCs and then setting up those LLCs in one legal entity. This strategy is only specific to certain states, however, like Texas. You’ll have to do your due diligence to find out if it’s an option where you live. If it is, it offers an additional layer of protection and makes doing your taxes that much easier.

Use advanced strategies. When you’re setting up an LLC, you can actually put the name of a trust as the registered manager. Since the trust doesn’t have to be publicly filed with the state, every aspect of your business is essentially anonymous as long as you don’t attach your name to any of your properties or LLCs.

Conclusion: How to Avoid Getting Sued When You’re a Real Estate Investor

Getting sued is probably one of the scariest things that can happen to a real estate investor. In this article, we laid out some basic strategies on how to avoid it.

One of the first things you should do is consult with your lawyer. While some of the strategies in this article are nearly universal, laws do vary from state to state, so it’s important to make sure the advice that you receive is personalized and actually applicable for your specific situation.

Beyond that, make sure that you have more than an umbrella insurance policy, don’t put your real estate assets under your own name, use a Series LLC to isolate your assets, and possibly even utilize some advanced strategies.

Want to make sure your real estate investing business is protected? Start with our investor quiz and we'll help you find ways to protect your assets.

Prohibited Transactions: What Investors Can (And Must NOT) Do

What are prohibited transactions?

If you don’t know, and you’re the owner of a self-directed (or “Solo”) 401(k) or self-directed (Solo) Roth IRA, you could end up in serious legal trouble.

In short, a "disqualified" person is anyone who directly benefits from any activity that occurs inside of a self-directed retirement account.

The Self-Directed IRA and Self-Directed 401(k) have become popular instruments for buying real estate over the past decade, because they allow “alternative” investments. With this growing popularity, there is a growing risk that the IRS will increase its enforcement of “prohibited transactions.”

In order to help you avoid accidentally making a prohibited transaction, in this article, we’re going to define some key terms that you need to know in order to get a solid grasp on the concept, outline common prohibited transactions, go over the four different types of prohibited transactions, and give you some tips on how to better protect your assets.

If you want to see our library of articles about these two self-directed retirement plans (note: they are not simply for retirement... they're also great vehicles for tax-free investing), click the links below to get our content hubs:

Terms to Know: Solo 401(k)/IRA, Disqualified Person, Prohibited Transaction

We’ll need to define a few terms first. Prohibited transactions are exactly what they sound like: transactions that aren’t allowed by the IRS. But for our purposes, “prohibited transactions” occur in a very specific context, and to explain that context, we need to go over some common definitions:

Solo 401(k) or Solo Roth IRA: essentially, this is a retirement account that grants you a little bit more freedom. Using a self-directed retirement account, you can invest in alternative assets like real estate, debt, vacant land, gold, silver, cryptocurrencies, and more. If you’re interested in setting up a Solo 401k, click the link to learn more.
Disqualified person: a disqualified person is anyone who benefits from the self-directed account. The IRS doesn’t want investors to use Solo 401(k)s and Solo Roth IRAs to avoid paying taxes. Both of the accounts are heavily tax-advantaged, and it wouldn’t be fair for someone to open a self-directed account to buy a beach-front vacation home tax-free. Unless that vacation home is a rental that isn’t used by any of the disqualified persons, which include the account owner (you, if you opened the self-directed account), the owner’s family members and friends, the custodian/manager of the account, a business entity you own, and more.
Prohibited Transactions: finally, prohibited transactions are any transactions that occur inside of the self-directed IRA that benefits disqualified persons. It’s very important to keep these funds separate from any personal funds. If you used a self-directed account to help you buy your nephew a new car, for example, you just engaged in a prohibited transaction. Sometimes they’re obvious; sometimes they’re not.

You might be thinking: If prohibited transactions include anything that directly benefits the account holder and his/her family, why would you ever open a self-directed account in the first place?

Well, just because you can’t buy assets that directly benefit you doesn’t mean that the assets never benefit you. You can still buy assets that make you a lot of money inside of the account.

It’s the difference between buying shares of a company and buying shares of your own company. Both can be wildly profitable, but only one benefits you directly.

Types of Prohibited Transactions

In general, there are four types of prohibited transactions. In this article, we already provided examples of a couple of them.

Direct Prohibited Transactions: any sort of transaction that directly benefits a disqualified person. If Tom uses his self-directed account to purchase a classic car for his son, that’s a direct prohibited transaction.

Indirect Prohibited Transactions: these are a bit trickier, but the gist of an indirect prohibited transaction is that the IRA or 401(k) owner takes multiple steps to avoid a direct prohibited transaction, while the outcome is largely the same as a direct prohibited transaction. For example, let’s imagine Tom from the above scenario really wants to get his son that classic car, so he loans funds to an acquaintance who ends up buying Tom’s son the car as a “gift.”

Self-Dealing Prohibited Transactions: if you use your funds to buy yourself a vacation home or primary residence, you’re self-dealing.

Conflict of Interest: this often coincides with self-dealing. If you loan money to a business entity that you own, this could be considered a conflict of interest.

What are Some of the Most Common Prohibited Transactions?

With that said, how do most people end up getting in trouble? It’s probably not how you might think.

You can’t be directly involved in the investments you make using a self-directed Roth IRA in any way, and that can lead to some confusing scenarios. Additionally, the money that you use to maintain the investment needs to come from inside the account.

That means the most common prohibited transactions are mistakes—not intentional fraud.

For example, if you buy a rental property with a self-directed account, you can’t go to that property to make repairs. You need to hire outside help to fix anything that may be broken, no matter how tempting it is to make the repairs yourself. And, when you’re paying for that outside help, you can’t use your personal savings. If you do, that’s a prohibited transaction.

Interested in learning more? Check out our related articles:

How Can You Avoid Making a Prohibited Transaction?

In order to avoid making a prohibited transaction and incurring penalties and fines, ask yourself two simple questions:

Outside of my account, do I personally benefit from making this investment?
Do any of my family members, friends, associates, or business entities personally benefit?

If the answer is "yes", you’re likely making a prohibited transaction.

IRS rules are difficult, and it can be nearly impossible to get a grasp on all of them.

If you want to make sure your real estate investing business is protected, start with our investor quiz and we'll help you find ways to protect your assets.

Is an LLC Structure Important for Real Estate Agents?

One of the first decisions you have to make as a small business owner (and yes, a real estate agent is a small business owner!) is how to structure your new venture.

A business structure dictates how you operate, the tax guidelines you have to follow, and what kind of legal protection you have if problems arise; therefore, it is vital that you choose the right type of structure for your business.

When you start your own real estate investment company as a real estate agent, it is doubly important that you protect your assets with the right business structure. Due to the nature of the business, it is essential that you are protected from potential consequences of litigation. Dig deeper into why an LLC structure for real estate agents is important and how Royal Legal Solutions can set you up for success.

What is an LLC?

A Limited Liability Company (LLC) is a type of business structure that protects its owners from losing personal assets if the company is sued. An LLC also offers tax advantages that differ from a Sole Proprietorship or more complex corporations.

As a business structure, LLCs are typically used by small business owners who want to limit their personal liability. This includes Realtors/real estate agents.

Is a Real Estate Agent Considered a Small Business Owner?

Real estate agents who also invest in real estate are considered small business owners. According to the IRS, real estate agents are treated as self-employed and considered a small business owner if they:

are not someone's employee
haven't formed a partnership with anyone
have not incorporated their business

If you work for yourself and file a 1099, you are considered a self-employed independent contractor in the eyes of the IRS.

What is the Best Business Structure for a Real Estate Agent?

The short version? The best business structure for real estate agents who own a real estate investment business is an LLC.

An LLC structure for real estate agents provides several benefits to real estate agent investors over other business structures. Among them:

Benefit #1: It Protects Assets

Protecting your personal assets is one of the biggest benefits of structuring your business as an LLC. If you are sued, your brokerage insurance may not cover the damages. If you operate as a sole proprietor, every single asset you own can be liquidated in a lawsuit.

When you structure as an LLC, however, your personal assets are protected. You would simply liquidate the LLC and start a new company. This is why an LLC is so important for real estate investors.

Benefit #2: It Saves Taxes

As an independent contractor, you are subject to the self-employment tax for independent contractors. The good news is that when you form an LLC and work with a knowledgeable legal real estate firm, you can choose to have your LLC taxed as a different type of entity.

An LLC is a legal designation rather than a tax designation; therefore, you can still be taxed as an S Corporation. S Corporations are not subject to the self-employment tax, which covers medicare and social security, that independent contractors have to pay, which benefits you.

Benefit #3: Self-Directed Retirement Accounts

When you structure as an LLC, you can use your LLC to start a Solo 401(k). With this account, you can buy tax-free investments, become a hard money lender and earn a high-interest rate on the money you loan. You can also loan money back to your LLC if needed.

Benefit #4: Professionalism

An LLC operates as the face of your business. When you're talking with clients about potential investment properties, speaking on behalf of a business organization rather than your personal name goes a long way. This lends a sense of professionalism and trust to those you work with in the real estate investment industry.

Work With a Legal Real Estate Team

As a real estate agent, you might not have considered the need for a corporate structure. But did you know 80% of real estate investors will be sued in their lifetime?

Are you prepared?

Don't let a frivolous lawsuit destroy your future. The correct LLC structure covers you in case your broker's insurance decides to leave you hanging. The right structure might be the difference between losing it all or just losing your LLC.

In the video below, Scott Smith, founder of Royal Legal Solutions, explains the best structure for real estate agents to pay fewer taxes through multiple tax strategies and shield themselves from litigation when deals go south.

When you work with a legal real estate team like Royal Legal Solutions, you set yourself up for success. You’ll learn how to maintain your LLC corporate structure to avoid losing your business. You'll benefit from our team’s expertise on asset protection structures that will protect your personal assets and build a wall of defense if a lawsuit happens.

Additionally, Royal Legal Solutions can help you work around the single-member LLC self-employment tax so your income is considered passive and you retain the financial benefits.

Protect Your Assets With Royal Legal Solutions

If you are a real estate agent who owns your own real estate investing company, ensure that you are protected from personal liability. Work with Royal Legal Solutions to structure your business as an LLC to avoid personal liability and gain the tax benefits of operating as a Limited Liability Company.

Want to make sure your real estate investing business is protected? Start with our investor quiz, and we'll help you find ways to protect your assets.

Realtor photo by Kindel Media from Pexels

Tax-Free Real Estate Investing: How To Get Started

Scott Smith, Royal Legal’s founder, and lead attorney, recently sat down with real estate investor J. Darrin Gross to discuss tax-free investing on Gross’s Commercial Real Estate Pro Network Podcast.

The delightful discussion covered not only the possibilities of tax-free investing in real estate but also how real estate investors can protect their assets. You can click the link above to listen or read on to learn more.

Tax-Free Investing vs. Tax-Deferred Investing

“Tax-free” investing is better thought of as “tax-deferred investing.” Whether you invest in a traditional 401(k) that taxes withdrawals or a Self-Directed Roth IRA, which taxes funds before use, the tax doesn’t just disappear. It’s a question of when the tax is paid.

You can accelerate the growth of your retirement account using either a Solo 401(k) or a Self-Directed IRA. In a nutshell, with tax-deferred real estate investing, you lend yourself money from your own Solo 401(k) that doesn’t have to be repaid until you retire.

How does this work in terms of W2 income?

Anyone with a W2 (employer) income can create their own 401(k) or IRA account. But with non-W2 income, one can take advantage of creating a Solo 401(k) that allows you to defer taxes.

What is a Solo 401(k)?

If you have non-W2 earnings and can demonstrate that you’re an “active” investor, you may qualify for a Solo 401(k). If you structure an entity properly and demonstrate that you are active in its operations, multiple advantages become available. You have to be able to deposit up to $50,000 annually and be in a position to borrow up to 50% of that balance without creating a taxable event. Royal Legal Solutions helps clients set up a Solo 401(k) to run themselves.

What is the advantage of a Solo 401(k)?

The advantage is that you only have to pay it back by the time you retire. So, for example, you can take $50,000 and put it into your 401(k) tax-free and loan yourself $25,000 of that to invest in anything you want.

You still owe that money back to your 401(k), but you don’t need to pay it off until you retire. In the meantime, you’ve got $25,000 in tax-free money in your Solo 401(k) that you can invest immediately.

Does passive real estate qualify?

No, it’s not legal to set up a Solo 401(k) with passive income. But you can open up your own property management company. Doing this turns passive income into active income.

Setting up a property management company for a Solo 401(k)

You can establish an S Corporation to be your property management company. As the sole employee of that S Corporation, you can then set up a Solo 401(k). There are a few inexpensive legal steps to this process, and Royal Legal Solutions can help set up a Solo 401(k) for you. Note: If you borrow money from the S corporation (via a loan), you’re never going to have capital gains.

Do I need to be a real estate professional to have a Solo 401(k)?

No, you just need to be earning active income. The income cannot be classified as passive. But passive income is easily converted into active income by setting up a real estate company, which can then be used to establish your Solo 401(k). The restrictions are light - you just have to be the sole employee of your own company to meet the conditions of a Solo 401(k).

Once you have set up the company, you can channel $50,000 per annum of non-W2 income into the company. That amount pays into the Solo 401(k) up to the $50,000 mark, and all of that is tax-free for now.

The advantage of investing with pre-tax dollars instead of post-tax dollars can typically be a 20-30% bump, and that’s where the actual returns are. You get a pretty significant increase in your investment amount this way, without much risk.

Should I invest with a Self-Directed IRA?

Income from a Self-Directed IRA LLC is also tax-deferred, meaning real estate investments can be made tax-free. The tax is paid later instead of paying tax on the returns of a real estate investment. This allows investors to select the assets they want to invest in, except for “prohibited transactions,” such as collectibles and life insurance.

Tax-Deferred Investing: The Takeaway

Tax-deferred investing is important to real estate investors because it allows them the available funds to buy property from their own Solo 401(k) without paying back a loan to a bank or other financial institution. Essentially, you owe the money you’ve borrowed back to your retirement account, in effect turning yourself into your bank. The difference is that you are an active business, not a passive generator of income.

If you start with tax-deferred investing in your 30s and you don’t have to pay the loan you took from yourself back for another 35 years, your wealth curve will likely have been on an upper trajectory, making it easier to pay the loan back at retirement. Having money available makes a real difference to your ability to invest in real estate today for profit in the future. Unlike using a credit card, the debt here makes more money in the short term, which will pay down later debts more quickly.

Royal Legal Solutions: Helping You Grow Investments Tax-Free

Royal Legal Solutions has tax-saving strategies for everyday real estate investors. Royal Legal Solutions can help you form a legitimate strategy to protect assets. If you are a real estate investor anywhere in the United States and want to learn more about tax-free investing and tax-deferred investments, start with our investor quiz, and we'll help! We are the one-stop shop for tax, legal, and business advice for real estate investors everywhere.

Living Trust or Last Will and Testament: Which is Better for Real Estate Investors?

Estate planning should be on any investor’s “to-do” list, especially the real estate investor. The steps you take now can ensure that your investments will be passed to your family members and chosen heirs according to your wishes—not how the probate court decides.

In this article, we'll examine the living trust and the will, explain their similarities and differences, and offer our recommendations for how you can combine the best of both tools.

How does a living trust work for the real estate investor?

When you form a living trust, you (the grantor) transfer the ownership of your assets (your property) to a special fund called a trust.

You name a responsible person (the trustee) to manage the trust and make sure your wishes are followed after your passing. The trustee can be a relative or a professional from a financial institution. From that point on, the trust owns the property – not you -- a fact that allows for the privacy of both you and your heirs.

A significant advantage of a living trust is that, unlike a will, it allows for the control of your assets to pass to your designated heirs without getting tied up in probate court. Another benefit is that the trust keeps the real estate value out of the taxable portion of your estate.

Other benefits of living trusts are that they are easier to modify and more difficult to challenge than wills.

A disadvantage of a living trust is that it can be complicated and expensive to set up, and it needs competent ongoing management. The cost to set up a living trust depends on the state you live in, the type of trust, and how complex the legal document needs to be.

How does a will fit into REI estate planning?

A will (often called a last will and testament) is a written document in which you name your minor children's guardians and bequeath your belongings and financial assets to individuals or charitable organizations. A will also can stipulate how you want your funeral or memorial service to be held. Whereas a trust becomes active as soon as you create it, a will becomes active upon your death.

All wills must go through probate, a legal process in which the court examines the documents. The probate process can be lengthy, especially if family members contest (object to) the will. As we have explained, trusts are difficult to contest, and they do not go through probate after the grantor's death.

It is wise to name an executor of your will. This trusted individual will know where your will is located and will have access to your personal and financial records after your death. Without an executor, a will is still valid, but without one, it's possible that the document might not be discovered after your death.

If you die intestate (without a will), your estate will be distributed according to your state's regulations. The state will name a personal representative (usually a surviving spouse or the oldest child) to distribute your assets, but the process takes time. Until then, your assets will be frozen.

An advantage of a will is that it can be easy and inexpensive to write -- especially with the many online tools that are available. However, your heirs may pay for your savings later by having to hire a probate lawyer.

Living Trust or Last Will and Testament: Which is Better for Real Estate Investors?

Your final piece of real estate ...

Get the best of both tools with a pour-over will and living trust

Having both a will and a living trust is a powerful way to gain peace of mind for both you and your family.

We recommend that real estate investors have the best of both estate planning tools -- a living trust and a traditional will – by creating a pour-over will along with a living trust.

A pour-over will names your trust as the beneficiary of any property that it does not already hold. Why would this feature be important? Let's say you have neglected to place your new vacation home or other valuable investment property into your trust.

State regulations vary but, without a pour-over will, that real estate might go to an estranged relative rather than to the heir of your choosing.

No one likes to think about their own passing. But the reality is that anyone who is buying and selling property needs to consider an estate plan in a practical, deliberate manner.

We recommend that you evaluate and update your trust documents at least once a year. As long as you remain mentally competent, you can change a revocable living trust at any time. You can fund new property purchases and add the beneficiaries you want to receive any new assets, allowing for a smooth transition.

Rest assured that if you haven't worked out these estate transfer details, your state and the federal government will work them out for you after your death.

You've worked hard to build up your portfolio. We know you want your real estate investments to benefit the people you love. Making an estate plan a priority now can save time, stress, and financial worry later for your loved ones.

Photo by Mike from Pexels

Alternative Investments: The Hidden Path to Huge Tax Savings

For decades, many people have thought they could only invest their retirement accounts on Wall Street.

Most Wall Street IRA custodians only allow you to invest in stocks, bonds, annuities, mutual funds, and CDs. The problem is that these traditional investments only make up a fraction of the profitable assets you can purchase for investment purposes.

But with a Self-Directed IRA, you can move beyond Wall Street and use your IRA funds to make self-directed investments in the “alternative investments” of your choice. Real estate is the most popular alternative investment people make with self-directed IRA funds.

You can use IRA funds to buy commercial and residential real estate, including houses, duplexes, condos, office buildings, shopping centers, mobile home parks, factories, and raw land. This article will explain alternative investments, their different types, and how they can provide you with significant savings at tax time.

What are alternative investments?

An alternative investment is an asset that falls outside the traditional categories of stocks, bonds, and currencies.

Since they are not tied to Wall Street, alternative investments can help diversify your portfolio and enhance your returns. Since many types of these investments are connected with the stock market, they can help investors achieve their long-term financial objectives, even during times of uncertainty in the market.

Alternative investments typically cover a wide range of strategies. However, most of these assets have the following characteristics:

Low correlation to traditional stocks and bonds
Higher return potential than traditional investments
Higher minimum investment requirements
More complex structures
Unique risk profiles
Unregulated by the Securities and Exchange Commission (SEC)

Alternative investments are not for everyone. For instance, they usually offer less liquidity than traditional investments. Many of these non-traditional assets require buyers to lock up their money for five or even 10 years.

What are the types of alternative investments?

Alternative investments can include both public and private assets. Here are some of the categories an investor may consider:

Real estate -- Real estate is the most common type of alternative investment. In addition to office buildings and farmland, however, the real estate category can include intellectual property, including inventions and artwork. The goal for the investor is to understand the long-term value of the asset.

Private equity -- This broad category includes investments in companies not listed on a public exchange. These assets can involve the following:

venture capital
growth capital
buyouts

Private debt -- Private debt involves investments that are not financed by banks or traded on the open market. It’s important to understand that the term “private” in this case refers to the investment instrument itself since both public and private companies can borrow funds via private debt.

Hedge funds – A hedge fund is an investment partnership. Hedge fund managers use a range of techniques – including leverage, short selling, and derivatives -- with the goal of generating a consistent level of return, regardless of what is happening on Wall Street.

Commodities and futures -- These assets include natural resources (such as oil and gas), agricultural products (such as corn and soybeans), and precious and industrial metals (such as gold and silver). The value of these assets follows changes with supply and demand.

Structured products -- Structured products are financial instruments with a value linked to that of an underlying asset, product, or index. Examples include:

market indices
individual or baskets of stocks, bonds, and commodities
currencies
interest rates
combination of the above

Collectibles – Although this type of investing may sound fun, it can be quite risky. Many experts warn that only true experts in the collected item, which can range from wine to action figures, should expect a sizable return on their investment.

What are the Tax Implications for Alternative Investments?

In addition to the diversity they offer your portfolio, alternative investments can also provide tax advantages.

The primary tax benefits of these assets are pass-through depreciation and long-term capital gains treatment. For example, many real estate funds deduct depreciation expenses from your net income, thereby reducing your taxable income.

Also, as longer-term investments, alternative assets may hedge against short-term capital gains taxes.

How to Use Your IRA or 401(k) to Invest in Real Estate

Did you know that you can invest in private alternative investments with qualified retirement funds, such as a 401(k) or IRA?

Most Wall Street IRA custodians allow you to invest only in traditional structures, such as stocks, bonds, mutual funds, annuities, and CDs. However, there are many reasons to form a Self-Directed IRA. Primary among them is that the structure allows you to use your IRA funds to invest in the alternative assets of your choice.

A Self-Directed IRA gives you complete control over your retirement assets. You can use a Self-Directed IRA LLC to make almost any type of investment. For example, the IRS permits using your Self-Directed IRA bank account to buy raw land real estate.

The advantage here is that taxes are deferred on all gains until a distribution takes place. (Before tax 401k distributions are not required until you reach the age of 70 and a half). And, with a Roth Self-Directed IRA, your gains become tax-exempt.

Be aware that the IRS has strict rules on these investments. It’s essential to keep good records of all income and expenses generated by your real estate investments. All income, gains, or losses from the investment needs to be allocated to the IRA.

To get the most out of your investment and avoid any tax issues, you should consider a Self-Directed IRA custodian. An IRA custodian is a financial institution that holds your account and makes sure that it adheres to all IRS and government regulations.

Finally, while most investors access alternative assets through their financial advisor or financial institution, there is a growing number of digital platforms that offer ways to buy them directly. If you are new to investing, we recommend working with a professional who understands the benefits and challenges of these non-traditional purchases.

Keep more of your money with a Royal Tax Review

Find out about the tax savings strategies that you can implement as a real estate investor or entrepreneur by taking our Tax Discovery quiz. We'll use this information to prepare to have a productive conversation. At the end of the quiz, you'll have an opportunity to schedule your consultation. TAKE THE TAX DISCOVERY QUIZ

S Corp Distributions: The Nitty-Gritty

The sad truth is that every year, we have to file and pay our taxes.

While it definitely is a pain in the neck, it can also be an opportunity to evaluate your financial progress for the year. The goal for taxes is almost always to maximize your deductions while minimizing taxes, but often this is easier said than done.

One way savvy real estate investors can reduce their tax bills without running afoul of the IRS is by paying themselves as much as possible through S Corp distributions. If you want to learn more about the nitty and the gritty of S Corp distributions, read on.

Why Real Estate Investors Love S Corps

S Corps are considered a “pass-through” entity for tax purposes. This means that the business is not required to pay corporate income taxes. Rather, the profits and losses for the business are distributed to the owners and reported as their personal income.

This is a tremendous advantage over C Corps, which is the default tax status for a corporation. Any income that a C Corp makes is double-taxed: once at the corporate level and again on the individual owner’s income tax return. Designating your business as an S Corps allows your company’s profit to only be taxed once.

You can also use an S Corp to reduce the burden of payroll and self-employment taxes. We’ll get more into this in a little bit. For now, just know that real estate investors often take advantage of these S Corp tax benefits.

However, S Corps will not be suitable for every investor. Due to the costs associated with an S Corp, it usually only makes sense for investors who are earning at least $50,000 annually from their business. If you’re making less than that, the costs of setting up and maintaining an S Corp will probably outweigh your tax savings. Talk to your CPA or a business lawyer to learn whether an S Corp can work for you. Or you can fill out our quick investor quiz and get the help you need.

What Is An S Corp Distribution?

If you’ve never heard of an S Corp distribution before, prepare to meet your new best friend! An S Corp distribution is your proportional share of the S Corps earnings for the year, based on the number of shares you own. It’s the best way to take money out of an S Corp.

If you’re the sole owner of your S Corp, you’ll just get 100% of the income. But if there are multiple shareholders, the earnings will be distributed on a per-share basis. The total earnings will be divided by the number of shares, and each shareholder will receive the same amount per share. So, while the shareholders might not all receive the same total amount, they must each receive an equal per-share payout.

For example, say an S Corp has issued 100 shares as follows:

Ross owns 35 shares
Rachel owns 25 shares
Monica owns 20 shares
Chandler owns 10 shares
Phoebe and Joey own 5 shares each

So, if the business made a profit of $1 million, this is how the dividends would be distributed:

$350,000 to Ross
$250,000 to Rachel
$200,000 to Monica
$100,000 to Chandler
$50,000 each to Phoebe and Joey

Limitations On Distributions

What’s great about distributions is that it’s considered “passive” income, which isn’t subject to payroll taxes. However, the IRS won’t let you skip out on payroll taxes altogether.

Before you can receive any distributions, you’ll have to pay yourself a “reasonable” salary for your contributions to the business. The secret to maximizing your tax savings is to pay yourself the lowest reasonable salary possible and taking the rest of the profits as a distribution.

The IRS doesn’t provide any direct guidelines for how to determine if your salary is reasonable, but some factors to consider include:

Your training, education, and experience
How much work you did
What kind of work you did
How much time and effort you spent
Historical distribution amounts
Market rates for similar work

If you set your salary too low, the IRS might reclassify some of your distributions as salary, which can lead to penalties and additional taxes. The best way to avoid scrutiny is to consult with your CPA or attorney before setting your salary.

Property Transfer Services: How One-Stop Shops Save Investors Money

Real estate investors are always looking for ways to minimize risk while maximizing profit.

One way that they can do this is to transfer title to their property from their personal name to protect themselves.

A property transfer service helps real estate investors move their properties into corporate structures (such as a Series LLC or a Land Trust) to protect assets from lawsuits and other creditors. These legal structures separate your assets and preserve your anonymity, making you look like less of a target for would-be litigants.

What Exactly Do Property Transfer Services Do?

While the process for property transfers is not incredibly elaborate, there are various steps and costs associated with transferring the title to real property. A one-stop-shop property transfer service takes care of everything you need to do to transfer your real estate, saving you time and money.

Bundling these services provides you with the convenience of only needing to find, vet, and transact with one business when securing your assets from unnecessary liability. And perhaps more importantly, these packaged services save investors money. You can always order each of the services “a la carte,” but a property transfer bundle saves money and dramatically simplifies the process.

Transferring Property Into A Series LLC/Land Trust Combo

We recommend using a Series LLC in conjunction with an anonymous Land Trust to secure maximum asset protection. When set up correctly, this combo will hide and protect your assets from potential lawsuit plaintiffs.

To pull this off, you’ll need several different services to be completed:

Drafting a deed
Forming an Anonymous Land Trust
Drafting a Series Document
Drafting a Series Operating Agreement

Drafting A Deed

First, in order to transfer property, you must have a properly drafted deed. A deed is a legal document used to transfer ownership of real property from one person to another. In this case, the deed must transfer title from your name to a Series LLC. For your Series LLC to give you the most protection possible, you must have a properly drafted deed that is correctly transferred into the Series LLC structure.

Creating A Series LLC

To have a properly drafted deed transferred into a Series LLC structure, you will need an accurately drafted and legally binding Series Document and Series Operating Agreements. Then, pairing an Anonymous Land Trust with the Series LLC stops lawsuits before they even start.

Forming an Anonymous Land Trust

An Anonymous Land Trust is a type of trust that allows you to hold title to land and other real-estate-associated assets anonymously, essentially hiding your assets. You can make the Land Trust the owner of your Series LLC, adding another layer of asset protection to your plan. To form an Anonymous Land Trust, you’ll need a properly drafted legal instrument.

Title Insurance Considerations

Title insurance is a specialized kind of insurance that protects you if there are legal issues with the title when transferring real estate. Can title insurance be transferred? The answer is yes, but only in certain situations.

When transferring property to a Series LLC structure, the most reliable method to maintain title insurance is to name a Land Trust as the beneficiary of your insurance policies. Adding your Land Trust as a beneficiary essentially guarantees that you'll get to keep your insurance.

Before transferring any property, it's definitely a good idea to review your insurance policy. Usually, when you transfer property, your hazard and title insurance expire. But if you transfer your properties into a Land Trust, you’ll be able to preserve both your hazard and title insurance.

This method is leaps and bounds better for you than getting a new insurance policy because your new insurance policy premiums would be based on the property’s current value. And thanks to appreciation, the current value will almost certainly be higher than it was when you bought it. While that's good news if you plan to sell it, it's bad news if you need to get a new insurance policy. It means you’d actually end up having to pay more—perhaps a lot more—than before. So you want to hold your policy to the last minute before being forced to renew.

Plus, if your policy isn't already near its expiration date, getting a new policy will unnecessarily cost you extra money, which certainly could be used for much more pleasant things than insurance. This is why it's worth the effort to use the Land Trust method to avoid triggering the expiration clause in the insurance contract.

Can’t I Just Do This Myself?

Every state has its own set of requirements for these documents to be legally valid, and there may even be county-level rules that apply. If a legal document is not drafted correctly, it can render even the most thoroughly planned asset protection plan ineffective. Working with a reputable property transfer service will ensure that everything goes off without a hitch.

Sure, you can find templates for these documents online, but these “free” options are rarely truly “free.” A small investment now could save everything you own later. Unless you happen to be both an experienced CPA and a licensed real estate attorney, it is unlikely that you will know all of the legal, financial, and technical requirements for creating effective and legally binding documents and entities. Don’t take that chance.

Whether you’re brand new to real estate investing or a seasoned investor with the portfolio to match, a competent property transfer service can handle the paperwork and answer your questions.

Why Your Self-Directed IRA Needs A Special Custodian

Individual Retirement Account (IRA) is a term known to all Americans, but even smart real estate investors we work with don't always understand how they work.

It all starts with understanding the role of the Self-Directed IRA custodian.

An IRA must be established by a bank, financial institution, or authorized trust company. Which means only banks such as Bank of America or financial institutions such as Fidelity are authorized to establish and administer IRAs. And not all of these IRA "custodians" allow your IRA to invest in alternative assets, such as real estate.

Not THAT kind of custodian ...

I'm here to say: You do NOT have to invest your IRA funds solely in Wall Street if you don't want to.

You may know that the IRA was designed by Congress to encourage people to save for retirement.
You of course know that you can contribute a certain amount of income each year to an IRA account for investment.

You also need to understand the concept of tax deferral and that retirement funds don't have to be invested only through Wall Street. See our article about Reasons To Form a Self Directed IRA to learn more.

**Traditional Institutions Do Not Always Have Your Financial Best Interests At Heart**

It’s not in the financial interests of the traditional institutional investment companies, such as Bank of America, Vanguard, or Scottrade to encourage you to make alternative investments using retirement funds.

Why? Because they make money when you invest in their financial products and keep your money there for a long time. They make money off of highly profitable trading commissions or by leveraging the power of your savings.

On the other hand, they make no money when you use your money to invest in alternative or nontraditional investments, such as a plot of land or a private business.

They get no commissions and lose access to your money when you don't invest through them. They have no reason to tell you about other forms of investing that wouldn't be in their best interest.

The IRS has permitted non-traditional/alternative investments since 1974. It says so right on the IRS website.

And what's the best way to make those non-traditional investments? Why, with a Self-Directed IRA of course!

So what do you need for a Self-Directed IRA? Money, for one thing. And a custodian who can help you invest it correctly. Which brings us back to the main point...

The Responsibilities Of A Self-Directed IRA Custodian

The majority of all Self-Directed IRA custodians are non-bank trust companies for the reasons outlined above.

The Self-Directed IRA custodian or trust company will typically have a banking relationship with a bank who will hold the IRA funds in a special account called an omnibus account, offering each Self-Directed IRA client FDIC protection of IRA funds up to $250,000 held in the account.

The following are the roles and responsibilities of a Self-Directed IRA custodian:

Record keeping.
Answering questions about your account.
Must be IRS approved.
Permitted to hold and custody IRA and 401k plan assets.
Subject to state regulation.
Review of your Self-Directed IRA assets.
Assisting in opening & funding your IRA account.
Making investments on your behalf (unless you choose to do so.)
Making distributions & paying expenses per your request.
Providing you with quarterly statements.
Reporting information required by the IRS and other governmental agencies.

What are the Differences Between a Self-Directed IRA Custodian and Third-Party Administrator?

All IRA custodians, banks, financial institutions, and approved trust companies are regulated and are authorized by the IRS to act as IRA custodians.

But since actual custodians are directly approved by the IRS, they are the only ones in this group that’s allowed to physically hold retirement assets. IRA custodians are needed in order to make investments with IRA funds.

Whereas, an IRA administrator is not able to hold IRA assets and is not approved or overseen by the IRS or any state banking regulators. IRA administrators essentially act as intermediaries between the IRA owner and a partner custodian.

You Should Work Directly With An IRA Custodian.

IRA administrators are not subject to any IRS or state audit or reviews. Which means they have less "motivation" to do their job perfectly.

An IRA custodian is subject to quarterly state banking division audits and reviews, as well as IRS audits, helping keep your IRA safe from prohibited transactions and fraud.

Using Your IRA to Invest In Crypto (4 Steps)

Crypto is blowing up. And traditional retirement accounts simply aren't equipped to handle the excitement.

Cryptocurrencies (like Bitcoin, Litecoin and Ethereum) are a popular alternative to government-backed currency—especially if you want to conduct transactions quickly and anonymously.

The global crypto market cap has been more than $2 trillion for much of 2021 so far. The market cap of Bitcoin (crypto’s biggest star) hit $1.2 trillion in April.

Looking to get in on the action? The Self-Directed IRA (SDIRA) is the best tool for leveraging your retirement savings to invest in digital currencies.

The SDIRA also offers major tax advantages, leaving you with more capital to invest in cryptocurrencies and other non-traditional assets.

Since Bitcoin and other digital currencies are intangible, they can be difficult for many traditional real estate investors to wrap their heads around.

However, investors who fully grasp how cryptocurrency works and wish to invest in this alternative asset through their retirement plans may do so with accounts that give them "checkbook control."

Steps To Take

Here are the steps you'll follow to invest in crypto using your SDIRA:

Establish and fund an SDIRA (Start with our investor quiz if you need help getting started and we'll take it from there.).
Register an LLC that is 100% owned by the IRA. This gives you the same tax-advantaged status as the IRA. The income and expenses related to the assets will flow through the IRA LLC in accordance with Internal Revenue Service requirements. Note: Cryptocurrency is considered property for federal tax purposes, but because the assets are owned by a retirement account, gains are tax advantaged.
Open a business checking account. You'll do this using funds from the IRA. An IRA LLC is also referred to as a “checkbook IRA.” The checkbook puts the account owner in full control of the transaction (checkbook control). The funds in the IRA LLC’s business checking account are solely for investing in the digital assets (or any other alternative assets allowed with self-directed accounts).
Open an account on a cryptocurrency exchange. You'll do this using the name (and tax number) of the IRA LLC. In addition to being purchased or traded on exchange platforms, digital assets may also be purchased through brokers or by investing in a fund that holds various digital currencies through private placement. In effect, the IRA purchases shares or directly invests as a limited partner.

Family Office Can Keep You Compliant

It's important that you get the right structure in place before you make a move in crypto or any other non-traditional asset. Royal Legal Solutions helps investors use an LLC (limited liability company) to incorporate cryptocurrency into their retirement accounts. If you don't have a LLC and a Self-Directed IRA for real estate investors structure set up already, let's talk about it.

We'll review your real estate investment options and business structures to ensure they are up-to-date, compliant, and bulletproof against whatever the future holds.

Once you're set up, you can become a Family Office member to ensure ongoing compliance with your state and local laws and tax requirements. We meet with our Family Office members every quarter to give them actionable steps to take, making sure their asset protection plans are up-to-date.

Why The Self-Directed IRA LLC Means You Don't Have To Pay IRA Custodian Fees

A Self-Directed IRA LLC is an IRS-approved tax structure that allows you to personally manage your retirement account without having to pay a custodian. It also offers several other benefits, such as ease of access and tax-free profits.

Self-Directed IRA LLCs vs. Traditional IRAs

A Self-Directed IRA LLC allows you to take control of your retirement by giving you the ability to invest in anything you want. Except for collectibles, such as art. The best part is, you won't have to ask a custodian for consent or pay any custodian fees.

With a traditional IRA, you must go through a custodian when you wish to make investments using your retirement funds, which often triggers high custodian fees and transaction delays.

With a Self-Directed IRA LLC, a special purpose limited liability company (“LLC”) is established that is owned by the IRA and managed by you or any third party. As manager of the IRA LLC, you will have total control over the IRA assets to make the investments you want and understand – not just investments forced upon you by Wall Street.

Not THAT kind of custodian ...

A Self-Directed IRA LLC Gives You Control of Your Retirement

With a Self-Directed IRA LLC, you will have total control to make any approved investment, including a real estate purchase. You can even pay for improvements and then sell the property without ever talking to the IRA LLC custodian.
Since all your IRA funds will be held at a local bank in the name of the Self-Directed IRA LLC, all you would need to do to engage in a real estate transaction or other investment is write a check straight from the IRA LLC account or simply wire the funds from the IRA LLC bank account.

No longer will you need to ask an IRA custodian for permission or have the IRA custodian sign the real estate transaction documents. You will be able to make investments by simply writing a check.

With a Self-Directed IRA LLC, you will never have to seek the consent of a custodian to make an investment or be subject to excessive custodian account fees based on account value and per transaction.

Self-Directed IRA LLC Benefits

#1 Invest in real estate & much more tax-free

With a Self-Directed IRA LLC, you will be able to invest in almost any type of investment opportunity, including real estate, tax-free.

#2 Virtually no IRA custodian fees

With a Self-Directed IRA LLC, you no longer have to pay excessive custodian fees based on account value and transaction fees. Instead, with a Self-Directed IRA LLC, you keep your money with a passive Self-Directed IRA custodian, often a bank.

Think of the passive custodian as a piggy bank for your Self-Directed IRA LLC. Whenever you need money for an investment, you just go to the piggy bank. You can write a check. You don't actually have to go or speak to your passive custodian.

#3 Tax deferral

With the Self-Directed IRA LLC structure, all income and gains from IRA investments will flow back to your Self-Directed IRA LLC tax-free.

An LLC is treated as a pass-through entity for federal income tax purposes and your IRA, as the member of the LLC, is a tax-exempt party. Which means all income and gains of the LLC will be tax-free.

A Self-Directed IRA LLC allows you to enjoy many more advantages, including the following:

Better protect your retirement assets from a falling stock market or against inflation.
Make a real estate or other investment by simply writing a check( Truly it is that easy.)
Generate profits tax-free when you use the same Self-Directed IRA LLC to purchase domestic and foreign real estate, private mortgages, gold and stocks, bonds, and mutual funds inside the same plan.
Buy your future retirement home or vacation property now at today’s prices, rent it out, and then move in at the age of 59 and 1/2!
Diversify your retirement portfolio and invest in almost any type of investment tax-free.
Take control of your retirement funds and hold them at a local bank or credit union.
Protect your IRA from creditors or bankruptcy.
Purchase real estate foreclosures and tax liens on the spot, or make personal loans by simply writing a check and generating profits tax-free.

To learn more Royal Legal Solutions' IRA LLC custodian services, take our investor quiz and you'll get the opportunity to book a free consultation.

Business Trusts: Your Key to Greater Control Over Your Investment Accounts

Business trusts can allow you to safely and inexpensively manage your Self-Directed IRA (SDIRA).

With typical IRAs, you’re at the mercy of the "custodian" (the financial institution that manages your investment). With a Self-Directed IRA business trust or LLC, you get access to different types of alternative investments (including real estate), that you otherwise wouldn’t be able to purchase with those funds.

So the SDIRA grants you the "checkbook control" you need, which means more direct authority and oversight over the investment and management decisions regarding the funds held in your retirement account.

With a business trust, there are even more benefits, as we'll see ...

Why You Should Use a Trust Instead of an LLC

If a legal entity allows you to manage your Self-Directed IRA more effectively, should you open a business trust or LLC? You could theoretically become the trustee of either entity, so why would you choose a business trust?

One key reason: the trust saves you money.

Business Trusts Don’t Have Annual Fees

LLC filing fees vary by state, but most states charge anywhere between $50-800 for annual filing fees and reports, creating an additional and unnecessary expense.

The states with the highest annual LLC filing fees are:

California ($800)
Massachusetts ($500)
Nevada ($350)
Delaware ($300)
Maryland ($300)
Tennessee ($300)
Washington DC ($300)

That’s not to mention the initial filing fee cost, which averages anywhere from $100-200. If you ignore or forget to pay your fees, your LLC gets shut down. If you’re managing a lot of money in that LLC, this could cause even bigger issues.

For Self-Directed IRA investors, business trusts offer the same checkbook control with fewer annual fees. That means a lower cost and generally less upkeep. A California business trust, for example, would save you $800 a year right off the bat (and an additional $70 if you count the initial filing fee). Instead, you could pay nothing annually.

But that isn’t the only benefit trusts afford you...

LLCs Can’t Offer the Same Level of Anonymity

Additionally, business trusts go beyond the protections afforded to you by an LLC. They don’t require that you file publicly. When you form an LLC, the Articles of Organization, along with your name and address as the trustee of that LLC, must be filed with your Secretary of State.

Business trusts don’t have that same requirement, giving you an additional layer of anonymity and asset protection in the event of a lawsuit. If the litigators can’t find who owns the trust, they can’t sue that person.

Tax Efficiency

Finally, business trusts can be more tax-efficient than LLCs. A business trust is considered a “disregarded entity” separate from its owner. That’s also true for LLCs—but there’s a key distinction: even if you file taxes as a partnership, most states require LLCs to file income taxes. If you choose to use an LLC, that’s an additional headache.

This also ties in with the anonymity. Business trusts don’t have to be filed publicly, they don’t have to be updated annually with any reports, and they don’t have to report income taxes. If you use them to shield your Self-Directed IRA, you’re protecting against legal trouble to the greatest possible extent while minimizing costs.

What Can You Hold in a Self Directed IRA Business Trust?

To give you an idea of the types of assets that you could invest in with your retirement funds using a business trust, here’s a short list:

Real Estate
Vacant land
Silver and Gold
Tax lien certificates
Cryptocurrency

However, just because you have access to more investments doesn’t mean there aren’t rules to what you’re allowed to do and what you aren’t allowed to do. We actually have a specific list of prohibited transactions.

For one, you aren’t allowed to self-deal in any way. If you want to buy a vacation home using your Self-Directed IRA, that’s prohibited. The investment can’t serve you, and you aren’t allowed to work on it yourself. If you choose to purchase a fixer-upper, you also need to hire contractors for that fixer-upper. DIY is expressly prohibited.

Your Key to Greater Control Over Your Investment Accounts

Here are some of the biggest takeaways from this article:

Both LLCs and business trusts give you an additional layer of asset protection.
Business trusts can save you money by cutting back on annual fees. Unlike a Traditional LLC, there is no registered agent, no franchise taxes, and no yearly fees.
They offer the same checkbook control as self-directed IRA LLCs with even more protection. They’re relatively simple to set up and there’s no legal requirement for you to publicly file your business trust, offering you additional anonymity.
You can use either a business trust or LLC to separate your personal assets from the holdings in either entity, protecting them in the event that you get sued.

Self-Directed IRA Bitcoin Investing

Bitcoin is constantly making headlines. We're getting a little sick of hearing about it, to be totally honest.

As Bitcoin becomes mainstream, we hear stories of the crypto-savvy investor buying Bitcoin in its early years and becoming a millionaire. Which leaves more investors asking, “Why not me?”

In 2021, IRA investors are increasingly diversifying with Bitcoin and other cryptocurrencies. Self-Directed Bitcoin IRA investing can deliver high yields along with the tax benefits of non-digital investment.

Here’s a brief primer on Bitcoin and three steps investors can take to start making their own Bitcoin investments using a Self-Directed IRA-owned Business Trust.

Bitcoin Basics

With cryptocurrencies, encryption is used to make new currency units and perform transactions. All this is done in a decentralized system and records are kept in a blockchain, which is a type of digital ledger.

Bitcoin, released in 2009 by Satoshi Nakamoto, is one of thousands of cryptocurrencies but is easily the most popular. Bitcoin must be stored using an online digital wallet or in a personal computer. Due to hacking concerns, some owners use a hardware wallet (a USB-like device protected with a PIN code).

Bitcoin Gets Attention From Investors

Bitcoin turned heads in the investment world by going from a price of under $1 in 2011 to $40,111 on January 14, 2021. The highs and lows have attracted headlines, as in December of 2017, when prices doubled in a matter of weeks. As I write this, its current U.S. value is $33,626.60.

Bitcoin’s wider adoption and impressive gains led to the “Bitcoin IRA," bringing the flashy new investment into the stodgy world of traditional retirement accounts.

Bitcoin Meets the IRA

A traditional IRA (individual retirement account) doesn't permit alternative investments such as Bitcoin and other cryptocurrencies. They're not really known for trying new things.

But what about the Self-Directed IRA (SDIRA), with its more flexible structure? The IRS doesn’t list Bitcoin as a forbidden investment (only list life insurance and collectibles are specified as non-permissible IRA investments). Check out our article, Our 3 Most Popular Self-Directed IRA Investments, to see what else is (and is not) permitted.

How to Invest in Bitcoin Using a Self-Directed IRA

#1 Do Your Research

The information I’ve provided about Bitcoin is a good primer, but is by no means a substitute for doing your own due diligence. Be prepared for the uncertainty that surrounds Bitcoin as a new investment.

Also, since Bitcoin isn’t under a regulated system don’t expect the same type of publicly available financials you’d find with traditional stocks or mutual funds.

You can educate yourself on how the IRS deals with Bitcoin investments; a good cryptocurrency resource is Investopedia.

#2 Choose the Right IRA Custodian

The "custodian" is the financial services company that manages your retirement account for you. To learn more, check out our article, Why Your Self-Directed IRA Needs A Special Custodian.

Traditional IRA custodians won't even think about it, but if you're in the market for the self-directed version, you'll need to make sure your IRA custodian is IRS-approved and allows Bitcoin investments. Still, you probably won’t enjoy true checkbook control over your account.

Your SDIRA is self-directed (as the name says), but it isn’t “self-managed.” This means you can’t write a check out yourself for a Bitcoin transaction without a custodian approving the transaction. The processing time can hurt you when you're trying to buy or sell quickly. Also, the fees can add up when choosing this route.

This doesn’t mean you should give up on Bitcoin investing with a Self-Directed IRA. Royal Legal Solutions may be able to help you eliminate the custodial overhead. Many of our clients are Bitcoin investors who enjoy direct control over their IRA investments. Start with our investor quiz to see if you can take advantage of our custodial services.

#3 Choose a Good Cryptocurrency Exchange

Once your Self-Directed IRA is setup and you have direct access to your funds, you’re ready to purchase Bitcoin. Choose a reputable exchange and understand its fee structures. More importantly, be aware of any security flaws and hacking issues. Currently, Coinbase and Kraken are some of the most reputable exchanges.

#4 Choose a Good Cryptocurrency Wallet

For those new to cryptocurrency, this step may seem like the hardest to understand. A cryptocurrency wallet isn’t a physical wallet, although it can take physical form as a hardware digital wallet. Wallets are accessed via a private key, which is a hexadecimal code that you should guard just as you would a security box key. Like a bank account, the wallet holds your balance and a reference to all transactions. It’s also where you can send and receive currency. Think about security when choosing a wallet. Online wallets are convenient and usually offer a mobile version. However, they are susceptible to hackers. Hardware wallets are more secure because they hold the private key in an offline, unhackable device.

#5 Keep Your BTC Investments in Compliance

The “self-dealing” rules that apply to other alternative assets also apply to Bitcoin. For instance, an investor can’t sell Bitcoin to his own IRA nor can any of his family members. This can disburse the IRA or lead to a taxable event. Also, be mindful of annual reporting requirements which require market valuations similar to real estate properties.

#6 Enjoy Tax-Deferred Earnings

With a Self-Directed IRA you can apply the tax-deferral benefits enjoyed by other alternative investments towards Bitcoin. Bitcoin investments can grow unhindered as taxes aren’t applied till funds are disbursed, which can mean decades of growth.

#7 Explore Other Cryptocurrency Investments

Bitcoin is the most widely-known cryptocurrency. However, once you’ve gotten your feet wet in Bitcoin investing, you can expand towards others currencies such as Ethereum and Litecoin. Like Bitcoin, Litecoin has enjoyed tremendous growth. It’s second to Bitcoin in market capitalization, followed by Ethereum and Ripple.

When expanding your Self-Directed IRA, consider what advantages rival currencies have as an alternative to Bitcoin. For instance, Litecoin enjoys faster transaction times and a larger coin supply limit of 84 million compared to Bitcoin’s 21 million.

Start Investing Today

Like any other investment, investors should complete their due diligence, choose the right custodian and be aware of custodial fees. Check out our Using Your IRA to Invest In Crypto (4 Steps) article while you're at it.

Lastly, keep Bitcoin investments in compliance with IRS regulations. The unique steps Bitcoin investors need to make may be overwhelming at first. They include choosing a cryptocurrency exchange and digital wallet. However, once investors get their feet wet, they’ll be a step ahead in expanding their Self-Directed IRA towards other cryptocurrencies. For now, investors could start off with Bitcoin and other private investments using a Self-Directed IRA.