Since the creation of IRAs back in the early 1970s, the IRS has always permitted an IRA to purchase, hold, or flip real estate. In fact, it states it right on the IRS website. By using a Self Directed IRA to buy real estate, you will be able to purchase raw land, domestic or foreign real estate, residential or commercial property, flip homes, and much more tax-free and without requiring custodian consent!
With a Self-Directed IRA with checkbook control, also known as a Real Estate IRA, flipping homes or engaging in a real estate transaction is as simple as writing a check. As manager of your Self-Directed IRA LLC, you have the authority to make real estate investment decisions on behalf of your IRA on your own without needing the consent of an IRA custodian. One of the true advantages of a checkbook control IRA is that when you want to purchase a home with your self-directed IRA, you can make the purchase, pay for the improvements, and even sell or flip the property on your own without involving the IRA custodian. In other words, with a checkbook control IRA LLC, you will have the power to flip homes r do multiple real estate transactions on your won without requiring the consent of a custodian. One additional important advantage of purchasing real estate with a Self-Directed IRA is that all income and gains are tax-deferred until a distribution is taken (Traditional IRA distributions are not required until the IRA owner turns 70 1/2). In the case of a Self-Directed Roth IRA LLC, all gains are tax-free.
A Self Directed IRA with checkbook control is the most efficient and cost effective vehicle for doing house flips with retirement funds transactions with retirement funds. With a Self Directed IRA with checkbook control, you will be able to use your IRA or 401(k) funds to purchase real estate and engage in flipping homes tax-free and without custodian consent. A traditional IRA custodian (financial institution) will not allow you to purchase real estate using your IRA or retirement funds. Therefore, in order to have the ability to engage in home flipping transactions using retirement funds, a Self Directed IRA LLC with Checkbook Control is the answer. Unlike a conventional Self Directed IRA which requires custodian consent and requires high custodian fees, a Self Directed IRA LLC with Checkbook Control will allow you to buy real estate by simply writing a check. With a traditional custodian controlled self directed IRA, you will have total control to make a real estate purchase, pay for improvements, and then sell the property without ever talking to the IRA custodian. Since all your IRA funds will be held at a local bank in the name of the Self Directed IRA LLC, all you would need to do to engage in a house flipping transaction is write a check straight from the IRA LLC account or simply wire the funds from the IRA LLC bank account. No longer would you need to ask the IRA custodian for permission or have the IRA custodian sign the real estate transaction documents. Instead, with a Checkbook Control IRA, as manager of the IRA LLC, you will be able to execute the real estate transaction by simply writing a check.
When engaging in real estate transaction, such as a house or IRA home flipping investment, one must keep in mind the Unrelated Business Taxable Income Rules (also known as UBTI or UBIT). The purpose of the UBTI or UBIT rules is to treat tax-exempt entities, such as charities, IRAs, and 401(k)s as a for-profit business when they engage in active business activities or use leverage. In other words, the IRS will allow a tax-exempt organization to engage in a passive activity that generates capital gains, interest, rental income, royalties, and dividends without incurring any tax (IRC 512). However, if the tax-exempt organization engages in an active trade or business, such as a restaurant, store, or manufacturing business, the IRS will tax the income from the business since the activity is not deemed to relate to the entity’s exempt purpose. The question is then asked, what level of real estate transaction must one cross before triggering the UBTOI or UBIT tax. Unfortunately, there is no clear test as to how many house flipping transactions or the number of real estate transactions one must engage in a given year in order to trigger the UBTI or UBIT tax. In general, the IES has a number if factors it will examine to determine whether one has engaged in a high enough volume or real estate transactions to trigger the UBTI or UBIT tax. Firstly, the IRS will examine the frequency of the transactions – how many flipping transactions are done in a year. Secondly, the IRS will examine the intent of the person – was the person intending to engage in an active trade or business. Thirdly, the IRS will also look at the scope of other activities of the tax-exempt entity to determine whether the activity is part of a business activity or an investment.
The determination of whether an an activity is an active trade or business and will, thus, trigger the UBTI or UBIt tax, which is taxed at a rate of approximately 35%, depends on the facts and circumstances. Therefore, it is important to work with a tax professional who can help one evaluate the transaction to determine whether the flipping transaction will trigger the UBTI or UBIT tax.