Quitclaim Deed Transfer for Cash Purchases in SDIRA: Yay or Nay?

3 Replies

Context: Detroit, SFH tax-foreclosures...properties ranging in value from $3K to 30K....no mortgage financing, only cash purchases between investors or investor to occupant / tenant.

Questions: Are there any legal issues with quitclaiming a deed from a tax foreclosure property to another person (investor or occupant)? Since this wouldn't require traditional underwriting, ie: no mortgage financing involved, are there any restrictions in cash-purchases of real estate where title is conveyed not by a warranty deed but with a quitclaim deed? And if this is done inside a SDIRA, will it trigger any UBIT if the transfer occurs too quickly after the acquisition of the property and considered wholesaling?

Example: I purchase a house for $1000 in a tax auction using my SDIRA and sell the property for $5000 a few months later and transfer ownership through a quitclaim deed. Proceeds go into my SDRIA, and repeat ;-)...no UBIT triggered because I'm not rehabbing and flipping....just acquiring and selling passively at arms length. My IRA LLC is off the hook legally because title has been transferred to another party. Do this sound right?

@Marc M.

This type of activity would be fine structurally, but would expose your SDIRA to UBIT if you conduct such activities on a regular or repeated basis.  

Your IRA is acting as a dealer of properties, i.e. a sales business where the properties are simply the inventory of the business. (not the same as "dealer status", BTW).

When it comes to real estate, income from rents is passive and exempted from UBIT per IRS publication 598.

@Brian Eastman , thanks for replying! What would you say (or rather what do you think the IRS would say) is a 'regular basis' of dealing an inventory of properties? 5-10 properties per year? or in the 20 or 30 range? My SDIRA advisor thought I'd be in the clear as long as stayed under 30 transactions per year.

Right now I have 6 properties in my SDIRA that may be easier for me to sell than rent out (and more profitable in the short term). I am finally getting my feet wet with SDIRA investing but my SDIRA is only in the 5-figures....and I'd like to grow it more aggressively than the cash-flow and appreciation will from the low-end properties I have now...

Best,

Marc

@Marc M.

The IRS will look at the facts and circumstances, and judge whether the activity is of a consistent enough basis and engaged upon in a manner that is similar in nature to commercial tax-paying businesses in the field.

You should consult with an ERISA attorney who can look at the entirety of your scenario and help you evaluate the threshold at which you may cross this line and have exposure to UBIT.

20-30 is a ludicrously high number of transactions.  I would think in the 3-5 per year at most, perhaps less if you also do this same kind of thing with after tax funds.