Self Directed IRA for Fix and Flip

[Ryan Sing]

I prefer to fix and flip and want to use an SDIRA for additional capital to increase my number of concurrent projects. Eventually I would then hold some property in the SDIRA. Most of the research on SDIRAs has led me to the advantages for rentals. Is it uncommon for investors to use an SDIRA for flipping and why is that? 

Thanks! 

[Brian Eastman]

@Ryan Sing

While an IRA may be used to invest in real estate in many ways, it is not designed to provide additional capital to your flipping business.

As a tax-sheltered vehicle, all investments of the IRA must be conducted at arm's length and exclusively for the benefit of the IRA. That means you cannot have any transactions or provision of benefit between the IRA and yourself, your spouse, lineal family, or family owned businesses.

So, you cannot add IRA capital to your own flipping deals. You also cannot work on a property that your IRA owns.

The IRA could invest in a property and have unrelated contractors fix the property in preparation for sale. The gain on sale would go back to the IRA on a tax-sheltered basis, so long as the frequency of such transactions is limited. An IRA is tax-sheltered when it receives income from passive activities like rents, interest, or capital gains. When an IRA engages in a trade or business on a regular or repeated basis (which frequent flipping becomes) then the IRA is subject to taxation called UBTI meant to level the playing field for tax-paying business and protect them from unfair competition.

So, generally an IRA is better suited to truly passive investments like holding rentals, private lending (such as to unrelated flippers), and syndications.