Threat to use of SDIRAs in pending legislation

Dubbed the “Reconciliation Bill,” there is currently a pending piece of legislature that could have a significant impact on the way that real estate investors, especially those who use their self directed IRAs to invest in real estate syndications as way to earning passive income. As an investor, one of the most important aspects of your strategy is to determine the best way to increase your own net worth while operating within the framework of the law. With that in mind, investors should certainly be monitoring the ongoing debates surrounding the Reconciliation Bill and everything that it entails.

Democrats who support the legislation have proposed to change the laws governing IRAs as a part of the $3.5 trillion budget package. One of the most potentially damaging aspects of the Reconciliation Bill focuses on investors who rely on a self-directed IRA, which allows you to invest in alternative investment classes, as a means of investing in real estate. Most notably, the bill, if passed, could prohibit investors who fund their investments with a self-directed IRA from investing in Private Placements. Private Placements (for example, Regulation D, Rule 506 Offerings), require IRA owners to meet minimum requirements that can relate to their education level, financial abilities, and even special licensing. To further complicate matters, the Reconciliation Bill could force investors to divest in these special investments within a couple years. This would mean that investors are required to reinvest their funds into a different asset or risk losing the tax benefits associated with a self-directed IRA.

One component of the proposed legislation would prohibit IRA owners from investing in unregistered investments. As the law currently states, accredited investors can invest in non-registered securities. Should this legislation be signed into law, that would no longer be the case. If you are invested in non-registered assets due to your accreditation status, you would be forced to divest or lose the tax benefits associated with your IRA.

Not only could these proposed changes of the Reconciliation Bill impact investors, but it may also have a far-reaching impact on the way that syndicators offer and sell these privately placed assets. Many syndicators work with investors who use their own financial savvy and their IRA funds to buy into the syndicate. Making this illegal would mean that syndicators all over the United States have to find a new way to sell ownership stakes in their syndication.

As things currently stand, Congress is still negotiating the details of the bill, and some concessions are expected to be made. As an investor or a syndicator, you should certainly be monitoring the ongoing talks surrounding one of the largest budget-related bills in our nation’s history. We’ll keep you informed as things develop.