All Forum Posts by: Gil Hartman

I know you can definitely convert to a self-directed IRA, we see it a couple of times a week on my team. It is just a matter of making sure it's worth it to invest in real estate with it given the RMD requirements. If you want to discuss the process, feel free to message me on here and we can set up a time to talk.

Hi Matt,

You can use an inherited IRA to make real estate investments. However, if you inherited the IRA from someone other than a spouse, you cannot treat the IRA as your own. That means you can't make contributions to the IRA, roll money into or out of the account (you can transfer custodians though), and you're required to begin receiving distributions from the IRA under the rules for distributions that apply to beneficiaries.

Gil

@Jon Holdman @Steven Hamilton II I'm going to admit that I'm "very wrong" on the subject of state's determining dealer status. After reviewing everything and researching, it's clear that I was inflating the influence of a state's policy on what constitutes dealer status. The case could be made that if you aren't required to register as a dealer in your state, you could use that in your determination with the IRS, but that's neither here nor there.

I should also clarify, I am not an advisor, and I would always refer clients over to professionals, such as @Steven Hamilton II for advice.

That being said, I still don't think flipping 1 or 2 properties a year as an investment would automatically make the account holder subject to UBIT. As you've both stated, the IRS will look at many factors when determining this, such as level of activity, number of properties "flipped", etc. It's really never black and white.

Thanks a lot for the discussion everyone! I learned quite a bit!

@Jon Holdman Thanks for the input.

Absolutely, state law comes into play. State law is what would determine your status as a dealer. As a SD IRA & Solo K custodian, we have spoken directly to many CPAs & attorneys regarding the matter. If the attorney you've spoken to has chosen to interpret the laws as flipping one property making you an operating company, that's his choice. However, if his opinion is that flipping a single property as an investment constitutes a good or a service, that's very limiting.

There are MANY factors that states and the IRS would look at in determining dealer status (making you an operating company, subject to UBIT). They look at how many properties you buy and sell per year, do you maintain a staff, how do you advertise, are you actively involved in the rehab of the property (which we know you can't contribute sweat equity in an IRA or Solo K), etc.

@Account Closed I think the question you pose gets down to the bones of the situation: What's an active business?

@Jon Holdman Intent absolutely matters, I'm not disputing that. But you wouldn't be subject until you reach dealer status, and each state has a different definition/limit.

I'm saying this speaking from experience. We have clients who flips properties who are not subject to UBIT because they don't classify as an operating business. UBIT only kicks in when it's deemed you are an operating company, and if, by clearly "set and ordinary laws", you are not an operating company, you are not subject to UBIT.

@Randy King A solo 401K maybe be subject to UBIT in the event it reaches the above mentioned dealer status. Solo 401Ks are exempt from UBIT in the case the real estate is leveraged.

@Christine Oliphant @Jon Holdman @Randy King Let me explain a bit more. A dealer is someone who holds property for sale rather than for investment. At a certain number of flips within an IRA, you would reach your state's requirement for "dealer status", generally about 5-10 flips within a year.

Beyond that, the IRS has certain things they consider when determining if the real estate investor gets dealer or investment status, such as the reason the property was acquired, time period held, efforts of the taxpayer to sell the property, etc. So they look at intent when determining dealer status as well.

@Jon Holdman At a certain number of flips, you would be subject to UBIT, correct. However, not every flip is subject to UBIT.

Hi Christine, on a fix and flip, you're spot on, that profit is not taxed until you distribute the funds. It's always a good idea to call around to some custodians, and like @Peter K. said, take advantage of the free training they have to offer.

@Mike McDermott Exactly. So it's not that plans are never restricted. You can still invest with disqualified parties, it's just a matter of making sure you do it properly.