When using the fix and flip calculator where would I capture repayment of IRA funds used to cover rehab costs? For example, if I plan to use $20,000 from my IRA to cover some rehab costs, where does that get recorded in the fix and flip calculator analysis to account for those funds being returned to my IRA after the property sells? Are they just part of the estimated rehab costs number I used or should I be doing something additional?
All funds for the purchase and for the rehab must come from the IRA, you can't use personal funds in the connection with the deal of your IRA
If you are financing the purchase, the loan must be non-recourse. Conventional loan would not be allowed since as disqualified person you are not allowed to provide personal guarantee. Non-recourse lenders typically require 40% down-payment and 10-15% reserves
If you are using custodial self-directed IRA - you will be the account owner, but will everything must flow through the custodian, they must sign all paperwork and disburse all the funds
If you wish to be able to handle all transactions directly, consider using Checkbook IRA
Flipping activity is considered an active business. If you run an active business in your IRA - all gains and profits will be subject to Unrelated Business Income Tax, which tops at almost 40%. Your IRA will owe this tax bill. Be sure to consult with a tax professional experienced in this field
If you are self-employed or own a small business, consider truly self-directed Solo 401k plan instead. It has many advantages over an IRA: not subject to UBIT tax on leveraged real estate, contribution limits are 10X higher, ability to take personal loan from it up to $50K, lower cost, tax-free investing using Roth sub-account grater protection and more flexibility
If you are flipping the house, and your personal energies or funds are used, then your IRA does not touch that deal. That would create a self-dealing prohibited transaction and invalidate the IRA.
If that is what you are describing, then your question is moot.
Is there a different way you are envisioning this transaction that is all IRA funds?
All the funds in connection with the rehab costs have to flow through the IRA so it would get recorded through the IRA custodian and the receipts and invoices would serve as further documentation.
Brian/George, I would not be doing anything personally regarding the deal or rehab other than signing paperwork and attending closing as my IRA "representative." What I'm trying to get at and apparently not doing a good job of explaining, is how those IRA funds show on paper in my profit calculation using the BP fix and flip calculator.
All funds for the purchase and for the rehab must come from the IRA, you can't use personal funds in the connection with the deal of your IRA
If you are financing the purchase, the loan must be non-recourse. Conventional loan would not be allowed since as disqualified person you are not allowed to provide personal guarantee. Non-recourse lenders typically require 40% down-payment and 10-15% reserves
If you are using custodial self-directed IRA - you will be the account owner, but will everything must flow through the custodian, they must sign all paperwork and disburse all the funds
If you wish to be able to handle all transactions directly, consider using Checkbook IRA
Flipping activity is considered an active business. If you run an active business in your IRA - all gains and profits will be subject to Unrelated Business Income Tax, which tops at almost 40%. Your IRA will owe this tax bill. Be sure to consult with a tax professional experienced in this field
If you are self-employed or own a small business, consider truly self-directed Solo 401k plan instead. It has many advantages over an IRA: not subject to UBIT tax on leveraged real estate, contribution limits are 10X higher, ability to take personal loan from it up to $50K, lower cost, tax-free investing using Roth sub-account grater protection and more flexibility
Real Estate Agent · Grand Junction, CO · Member since 2015 · 1k+ posts · 736 votes
8y
@Charles Brown while the others are correct in their warnings (I have flipped within an IRA) I understand your question. I'm a little concerned that you can't figure this out without the calculator but... If the IRA owns 100% of the project then just treat the purchase & rehab amounts as a "mortgage". 100% of all profits must return to the IRA. If the IRA won't own 100% then you need to divide the costs with the other "partner" - the IRA is 60% and the partner 40% based on the amount each will be contributing. This percentage is established at purchase and will be required by your custodian. The custodian will then require receipts for the full amounts of rehab but will only pay the 60% owed... Does that make sense?
Teri, Actually I was treating the purchase and rehab amounts as one i.e., a "mortgage" but wasn't clear as it related to capturing them in this calculator. I've been using MS Excel but wanted something better so I used the calculator just to try it out since I'd never used it before. This is a property that I'm running numbers to make an offer not something I've done. Thanks.
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
8y
@Charles Brown I just reviewed the Fix and Flip calculator and little confused on your questions. What is it specifically that you are trying to figure out?
Few things that are confusing in your statements are:
"capture repayment of IRA funds used to cover rehab costs" - If you are doing this deal inside of an IRA are you are not pulling funds "out of an IRA" to do this deal. Your IRA does this deal, not your personally. So you don't have to repay anything back to the IRA, all profits belong to the IRA
"use $20,000 from my IRA to cover some rehab costs" - again, if this deal is done inside of an IRA then your IRA will pay allrehab coasts, not some
the calculator is not designed to address the "mortgage", it is designed to help you calculate the numbers on the flip, if there is a mortgage it would be part of the holding cost, there is a place to enter that in the calculator
It seems to me that you are somehow trying to separate this deal from your IRA, that might be where your error is. If you are doing this deal in your IRA - all of the numbers would be part of the IRA.
If you are willing to provide further explanation perhaps we can help you. But you can only get so much on the forum, I recommend you reach out to an expert who can walk you through all the steps and all the numbers involved.