Berry's rule of "never talking down" has made him a favorite with self-directed investors across the country. "It is refreshing to speak with a lawyer with our best interests in mind," explained one client who consulted with Tim prior to purchasing some properties in his self-directed IRA.
"Tim is thorough, accessible, and, most importantly, effective," added another, who once moved IRA funds incorrectly and opened himself up to taxes on his account. Berry was able to "penetrate the bureaucratic wall at the IRS...and the initial IRS ruling was reversed," the client concluded.
It is a good thing Berry is accessible, because, as most self-directed investors know, the tax code certainly is not. "I have something of a jaded view when it comes to government," he admitted. "My view is that there is very little logic when it comes to legislation in Washington. What it all comes down to is what special interest is most persuasive and how much can a policy-maker get for giving them what they want. Unfortunately, that is the history of the tax code. You can see why it looks illogical to the rest of us!"
As an example, Berry cited a crucial difference between using debt to fund real estate investments in a self-directed IRA compared to using debt to fund real estate investments in a self-directed 401(k). In both cases, when the project yields positive results, the account holds debt-financed income proportionally to the volume of the project that was initially financed.
The account holder has done nothing wrong in either scenario, but only the IRA investor owes taxes. On the other hand, the 401(k) investor does not.
"The debt-financed income rule simply does not apply to 401(k)s," Berry said. "Why not? Because the real estate developer community, which is a powerful interest from a powerful business sector, gets a lot of money from 401(k)s and not much from IRAs. Years ago, that community demanded a loophole for 401(k)s and got one. They left out the individual investors because, bluntly, those investors weren't on the developers' radar."
Fortunately for self-directed investors using 401(k)s to invest in real estate, the loophole does not specify the amount of capital that must be in the 401(k). "This exemption applies across the board, whether you have $100 million or $100 in your 401(k)," Berry said.
"If you have $100 in your 401(k) and you go into a no-money-down transaction with leverage and make your fortune, your profits are not taxed in that account even though if you did the same thing in your Roth IRA or other IRA, you would pay taxes on those profits."