If your goal is to use IRA capital to get involved in flipping opportunities while maximizing the returns to the IRA, you would do this through a self-directed IRA or Solo 401k.
If the IRA is the flipper (i.e. you direct the activities but hire out all the work, and the IRA has a direct equity stake in the profits from the flip), then there is a tax known as UBIT that applies. This tax applied when any tax-exempt entity engages in a trade or business on a regular or repeated basis (and is therefore competing with tax-paying businesses). The tax is intended to level the playing field for tax-paying businesses and pre-dates IRA plans by several decades. That said, you simply do the math and determine if the after-tax gains your IRA receives from these deals is better than anything else you can do with your IRA. If you are doing the right flips, it can be.
An alternative option within the tax-sheltered IRA/401k realm is not to have the IRA be the flipper and have exposure to UBIT, but rather to lend hard-money to other flippers. Interest (and points on a loan) are passive income not subject to UBIT. So perhaps your IRA lends to a contractor flipping houses and charges 2 points and 12-15% interest depending on the risk, LTV and what your market will bear.
There is another route, which is the Rollover as Business Startup (ROBS plan). In this structure, the IRA funds are used to capitalize a business in which you can be an active player and draw a salary. There are no taxes or penalties for using the retirement funds, but the business will need to be structured a a C-Corp and will pay corporate taxes in addition to income taxes you will pay on compensation you take from the business. If the goal is for you to setup a real estate development company for yourself, this is an option. While you can use this tool to build the retirement plan (which will be a shareholder of the corporation), this really more about capitalizing the business and less about tax-sheltered gains for the retirement plan.
Bottom line is you should get on the horn with a couple of experts in this field who can discuss what your real situation and goals are and make a recommendation. SDIRA plans come with a lot of options.
what you are referring to here is IRA owned LLC, also known as Checkbook IRA. The main reason for this strategy is to bypass the custodian when making investments and investment related transaction and obtain checkbook control over your retirement account. This is accomplished by establishing special purpose, single member LLC, which is owned by your IRA. You are designated manager of the LLC which gives you total control.
The same rules that apply to SD IRA would also apply to IRA LLC.
You don't need to put money back into your IRA when you liquidate the investments. The funds can remain in the LLC for your to reinvest.
If you intend to fun a flipping business out of the LLC you need to be aware of the UBIT (Unrelated Business Income Tax), which is would be assessed on all incomes and gains derived from unrelated business activities (flipping would fall into this category). This tax tops at 39% so be sure to consult with the knowledgeable CPA, tax attorney or other tax professional experienced in this area before you jump in.
Hope this helps and if you have any other questions let me know.
O Fallon, MO · Member since 2016 · 15 posts · 1 vote
10y
Thank you. Maybe my question should be, what is the best way to use IRA money to finance a new business venture that will flip houses. I would like to shelter to proceeds above what the IRA provides to the LLC. Even if I have to put the proceeds into a IRA until I'm older?
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
10y
Carl, IRA can invest on its own and IRA can flip properties (subject to UBIT as stated earlier), but IRS rules prohibit you using your IRA funds to fund your own business venture. All transactions involving your IRA must be 'arms length', in other words IRA is prohibited from engaging in a transaction with a 'disqualified person'.
If your goal is to use IRA capital to get involved in flipping opportunities while maximizing the returns to the IRA, you would do this through a self-directed IRA or Solo 401k.
If the IRA is the flipper (i.e. you direct the activities but hire out all the work, and the IRA has a direct equity stake in the profits from the flip), then there is a tax known as UBIT that applies. This tax applied when any tax-exempt entity engages in a trade or business on a regular or repeated basis (and is therefore competing with tax-paying businesses). The tax is intended to level the playing field for tax-paying businesses and pre-dates IRA plans by several decades. That said, you simply do the math and determine if the after-tax gains your IRA receives from these deals is better than anything else you can do with your IRA. If you are doing the right flips, it can be.
An alternative option within the tax-sheltered IRA/401k realm is not to have the IRA be the flipper and have exposure to UBIT, but rather to lend hard-money to other flippers. Interest (and points on a loan) are passive income not subject to UBIT. So perhaps your IRA lends to a contractor flipping houses and charges 2 points and 12-15% interest depending on the risk, LTV and what your market will bear.
There is another route, which is the Rollover as Business Startup (ROBS plan). In this structure, the IRA funds are used to capitalize a business in which you can be an active player and draw a salary. There are no taxes or penalties for using the retirement funds, but the business will need to be structured a a C-Corp and will pay corporate taxes in addition to income taxes you will pay on compensation you take from the business. If the goal is for you to setup a real estate development company for yourself, this is an option. While you can use this tool to build the retirement plan (which will be a shareholder of the corporation), this really more about capitalizing the business and less about tax-sheltered gains for the retirement plan.
Bottom line is you should get on the horn with a couple of experts in this field who can discuss what your real situation and goals are and make a recommendation. SDIRA plans come with a lot of options.
The only option you will have with an existing Roth IRA is a self-directed IRA LLC. The Roth IRA may not be rolled over into the qualified plan at the back-end of the ROBS structure.
As such, you will want to evaluate whether direct flipping, hard-money lending, or buying-fixing-renting... and then selling in the future to capture the gain in value (which can eliminate UBIT exposure) will produce the best results for your capital, time, and risk tolerance.
1. You don't need an LLC to invest your IRA in flipping. There is some controversy with Checkbook LLC for an IRA, which haven't been fully tested in Tax Court.
2. The rules are very specific and fatal and can blow up your IRS if you make mistakes. The best book on the subject (which I did not write and have no financial interest in) is "The Self Directed IRA Handbook" by Mat Sorensen
Generally when you flip real estate inside an IRA or 401k plan, it will subject the account to a tax known as UBIT.
If you want to flip real estate inside a retirement account without paying unrelated business income tax, then explore the ROBS 401(k) will allow you to fund your own real estate operating company using retirement funds tax and penalty free and you can even draw a fair salary.
Real Estate Broker/Investor · Chicago, IL · Member since 2015 · 106 posts · 22 votes
10y
I am not a fan of Checkbook IRA's as you really have to pay attention in order to make sure that personal funds are not being commingled with IRA monies. That's one of the ways to have your whole IRA disqualified.
Also, it looks like UBIT was not fully explained. When real estate transactions come into play and debt is used it triggers UDFI or unrelated debt financed income tax. (UBIT is a tax on unrelated transactions to the main purpose of the entity). UDFI is also assessed on the portion of debt and I advise that a potential investor always speaks to a qualified tax specialist.