Investing in raw land that is under ag exemption in texas

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Investing in raw land that is under ag exemption in texas

Ken Neusaenger
Member since 2018 · 1 post · 0 votes

I'm interested in purchasing a piece of raw land that is about 20 acres using my IRA. It is currently raw land with no improvements. I have more than enough in the account to pay for the land - about 4X the cost of the land with still a couple hundred K in it if i bought it. I can always transfer more if needed.

To maintain the Agricultural exemption and extremely favorable tax status, i'd have to run a couple of cows on the property and let them graze.  It would also have to be mowed occasionally to keep the weeds down.

I have a tractor and all the equipment to maintain/fence/etc. for cattle but it appears that wouldn't be arm's length even if I did the labor for free. I'd have to pay someone to build the fence, but mowing it regularly is something I can do. The IRA an buy my tractor and fuel if that fixes the issue but I want to run the tractor myself instead of paying someone.

Is there any way I can get around this without running afoul of IRS rules? My thinking was to buy 1/2 acre with cash from my regular accounts and the 19.5 with my IRA. I'd eventually build a house on the 1/2 and leave the 19 1/2 in my IRA until I retire. (I'm 59 1/2 in 9 years).

If I can't maintain the Ag exemption by running a couple of cattle and mowing on my own nickle it won't be a cost-effective investment...

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  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
    8y

    @Ken Neusaenger

    Your strategy has several issues with respect to IRS guidelines.

    In exchange for tax-sheltered status in an IRA, the IRS rules prohibit any direct or indirect benefit, in either direction, between you and the IRA.

    Simply from the starting point of you buying a parcel personally and having the IRA buy the rest, you have introduced risk.

    Any services associated with the property must be performed by an unrelated 3rd party. You may not perform work and be compensated, nor may you provide services for free. To do so would be injecting value into the IRA and akin to undocumented contributions to the IRA.

    The IRA could not purchase your tractor from you and you may not be the one doing the mowing under any arrangement.

    For you to run cattle on the land would also potentially create issues. It would be more appropriate to lease the land to someone running cattle and paying your IRA rent.

    So, this transaction likely does not fit well with an IRA.

    Generally speaking, when the thought process is "I would like to do 'X'. How can I tap my IRA to do so?", that is not going to be suitable.

    A self-directed IRA is still in all ways an IRA, just with different investment capacity. The correct line of thinking is "What opportunities in my network and experience can my IRA tap into and get better results than what it is invested in today?" But your role is simply "fund manager". You get to put the capital to work exclusively for the benefit of the IRA and entirely at arm's length.

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  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    8y

    Ken, you will run afoul of the IRA rules with this proposal. It has many holes as Brian eloquently outlined above.

    All transactions that your IRA engages in must be "arms length" (no personal involvement). If you have an IRA with sizable amount in it - there are many legitimate ways to invest while earning a handsome returns, you just need to consider little different approach.

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