Recently, in the comments of another post, Greg asked some great questions about investing in tax lien certificates with a self-directed IRA. He had quite a few good questions and I think that everyone can benefit from the answers so I will attempt to answer them here. The questions that I am not able to answer I will forward on the Edwin Kelley of Equity Trust Company, since Greg has an account with Equity Trust.

So Here are the questions and answers about investing in tax liens with a self-directed IRA

Question #1: there will be expenses incurred (eg. education, subscription services for lists/research, travel to auctions, etc) I’d like for these to be deductible but I don’t see how that can be done w/o violating IRA rules. This is especially true if some of these costs can be attributed to non-IRA investment in tax deeds and liens in which case I expect that I would need to prorate which part of the costs are expense-able – which sounds like ripe ground for accusations of co-mingling funds and disqualifying the IRA.

Answer: It really doesn’t matter if you invest inside or outside of self-directed IRA, I do not think that these expenses are deductible, but you would need to take that up with your accountant. You cannot use money from your IRA for these expenses. You can use after tax money for these expenses and some of your traveling expenses may be deductible, but again you need to talk to an accountant about that.

Question #2: expenses: even without deducting them I am concerned about the risk of running afoul of IRS rules re getting current benefits from retirement assets. I’d really like to understand what safe harbor activities there are w/ regard to these expenses.

Answer: In this case your retirement assets are the tax lien certificates held in your custodial account and the profit that comes from them, which will also go into your custodial account, so you are not receiving benefit from that. The only way that you would receive benefit from your retirement assets in this case is if the profit came to you instead of your IRA or if you foreclose on a property through your IRA and you or a member of your family live in or rent the property. This is my understanding, but I would check it out with your custodian, since I am not a retirement account expert.

Question #3: Most counties are geared to communicate with a single party who owns a lien. If it is my IRA that owns it then the address listed is probably theirs. This seems like a recipe to lose correspondence, or have very slow correspondence, or have correspondence directed to the wrong IRA owner, or have the IRA custodian/administrator charge excessive fees for being a middle man in the correspondence.

Answer: the agent who is bidding at the sale and is the contact person for the county does not have to be the same entity or person that the tax lien certificate is titled to. So you could be the contact person, it does not have to be your IRA, even though the tax lien certificate is titled in the name of your IRA and any redemption check will be made out to your IRA. Notifications?could still come to you.

Questions #4: Most counties require a federal tax payer id number and a W9 in order to function. If I invest with my IRA then I will need to use the custodian?s tax id. Many county systems will not be able to recognize that my IRA is distinct from someone else?s IRA with the same custodian.

Answer: This has been a problem in the past but many counties have already found a way to deal with this. They give you another number along with the custodian’s ID number. You can check with each county that you invest and with Equity Trust to see how this is managed. But I do know that many people invest with their self-directed IRA and there is a way around this.

Question #5: Many online auctions take payment via ACH. If I use an self directed IRA I don?t believe that I can make payments via ACH and instead can just have cashier checks drafted written to the county with the tax sale. I don?t see how to make that work for online auctions.

Answer: Some online auctions do require ACH deposit and payments instead of a wire transfer. The difference is that when you do a ACH deposit you give them permission to deduct money for the final payment from your bank account. When you do a wire transfer, you initiate the transfer just for the deposit amount. You may be able to set up a bank account through your custodian that can do an ACH deposit, this is something that you’d have to talk to your custodian about.

For me personally, when I invest with money from a self-directed IRA I like to invest in a tax lien investing fund or with a tax lien investing agent. That way I transfer one lump sum of money one time, either to buy shares in a fund or to set up an account with and agent and they take care of anything else. Not only do I not have to worry about requesting funds from my SDIRA, I also don’t have to do any of the work: due diligence, bidding, etc.

I will also forward these questions on to Edwin Kelley to get his answers to them.

Happy and Prosperous Investing,

Joanne