Self Directed IRA Questions

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Self Directed IRA Questions

John LyszczykPro Member
Rental Property Investor · Marine City, MI · Member since 2016 · 146 posts · 230 votes

My Dad is trying to buy raw land in Michigan by rolling over his traditional IRA to a Self Directed IRA. This is a long-term investment. I understand we cannot use this for personal use. I have a few questions that maybe the BP community can help with:

1) We want to build a pole barn on the property. Not for personal use. Simply to increase the resale value of the vacant land. Can we do this?

2) If we wanted to divide it up and sell the property in smaller parcels could we do that?

And one last side question unrelated to my situation...

Can I buy real estate that has a dwelling with the intentions of flipping the property to get a positive return using the money in the Self Directed IRA?

I understand this is a complicated transaction and I am in the process of talking with an accountant...any insight would be helpful. Thank you!

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Roger StPierreBusiness Member
Lender · Rapid City, SD · Member since 2017 · 30 posts · 20 votes
9y

John,

To be clear, I am not a self directed IRA provider, but a non recourse lender who has a decade of experience in this area. From my perspective:

1. Your father's SDIRA could hire a contractor (unrelated person, not a disqualified party) to build a pole barn on that raw land, as long as he or you did not use your own labor or materials for that. All must be purchased by the IRA.

2. Conceivably his IRA could then divide and sell the smaller parcels as long as all the proceeds were put back into the
SDIRA, and none of the sales were to Disqualified Persons. 

3. Flipping real estate is possible but you must check the rules, as if it is a continual business, and not a once a year deal, there may be UBIT taxes potentially on the profits of such a venture.  

[email protected]605-341-1203
First Western Federal Savings Bank
WebsiteView Page
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  • Roger StPierreBusiness Member
    Lender · Rapid City, SD · Member since 2017 · 30 posts · 20 votes
    9y

    John,

    To be clear, I am not a self directed IRA provider, but a non recourse lender who has a decade of experience in this area. From my perspective:

    1. Your father's SDIRA could hire a contractor (unrelated person, not a disqualified party) to build a pole barn on that raw land, as long as he or you did not use your own labor or materials for that. All must be purchased by the IRA.

    2. Conceivably his IRA could then divide and sell the smaller parcels as long as all the proceeds were put back into the
    SDIRA, and none of the sales were to Disqualified Persons. 

    3. Flipping real estate is possible but you must check the rules, as if it is a continual business, and not a once a year deal, there may be UBIT taxes potentially on the profits of such a venture.  

    [email protected]605-341-1203
    First Western Federal Savings Bank
    WebsiteView Page
    1Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    9y

    John, I wrote an article on this subject (flipping) here on BP blog awhile back, hopefully you'll find it helpful:

    https://www.biggerpockets.com/blogs/2810/54795-usi...

    0Reply
  • Linda Wanless
    Member since 2019 · 3 posts · 1 vote
    7y

    Hello, can a 501c3 Non -Profit buy property? thank you

    0Reply
  • Frank LaViola
    Flipper/Rehabber · Houston, TX · Member since 2019 · 24 posts · 8 votes
    7y

    @Dmitriy Fomichenko can one use the positive cash flow from these rentals or does the profit stay in the IRA until retirement?

    0Reply
  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
    7y

    @Frank LaViola

    All income and expenses remain within the IRA. A self-directed IRA is just like any other IRA when it comes to tax-sheltered savings, contributions, distributions, etc. The IRA just has more choices of what to invest in. A rental property is treated just as if it were a stock or fund in most all senses.

    Of course, by diversifying your IRA into rental property, the plan principal is more secure and not exposed to the same types of news-driven volatility. Real estate also provides for potential income through property improvements made by the IRA, cash flow, and appreciation. One can also use leverage in the form of non-recourse mortgages.

    So, is it possible to get better results for your IRA savings by diversifying into real estate? With the right deals structured the right way, absolutely!

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  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    7y
    Originally posted by @Frank LaViola:

    @Dmitriy Fomichenko can one use the positive cash flow from these rentals or does the profit stay in the IRA until retirement?

    Frank, all income from the investments belongs to the owner of the investment, your IRA. You as the IRA account owner can use cash in your IRA (take distributions) subject to applicable taxes and penalties if you take premature distributions. Just like any other IRA, the concept is the same, the only difference with self-directed IRA is the ability to invest in alternative assets outside of the stock market.

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