Investors often want to use funds from their real estate IRA to renovate property and sell it for a profit, but it’s critical to know the applicable rules. There are real estate IRA restrictions. David Moore with IRA Advantage looks at these restrictions and explains how to steer clear of trouble when it comes to these transactions.
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May I use funds from my real estate IRA to renovate property and sell it at a higher price?
You can use funds from your real estate IRA to renovate property and sell it at a higher price. The issue you may have with that is that you can’t personally work on the property. That would be considered a prohibited transaction. Sweat equity is not okay. If you are flipping properties, then you will have to pay somebody to do that work for you.
There is also an issue about the number of properties. You can do one or two or three in a given year, but if you’re holding property for resale, not investment, then at some point, the IRS is going to want money from you. They will look at it and say it’s taxable income from an unrelated business. UBTI is how it’s referenced.
Just like somebody who wants to flip property with tax money, at some point they may cross a line from being an investor to a dealer. In this world, you’re really looking at the same thing. When you’re making these investments, investors inevitably want to say they’re making an investment, but a lot of times, what they’re really doing is going out and creating a business, and that business income is going to trigger tax.
Here’s an example: Let’s say you have an apartment building, and you have a laundromat in that apartment building. The laundromat might be creating some nice, additional cash flow for the building, but the laundromat is part of an investment—it’s not a business in that scenario. But if you think, “Gee, this laundromat’s been doing great in my building, so I’d like to go out and put a laundromat together and do it with my retirement account, too,” well, you can do that, but then you would be running a business. The issue is that the government doesn’t want these tax-privileged entities creating unfair competition with the regular marketplace.
Yes, you may use funds from your IRA to renovate property and flip it, but you have to have good tax people. You also need to understand there’s going to be a line you’re crossing at some point. And don’t forget—and I need to stress this more than anything—you can’t be working on the property. Sweat equity is never okay in this circumstance. You can perform the administrative functions, managing the project and so forth, but get contractors to do the work.
Are there other restrictions with a real estate IRA?
IRA investing is really pretty simple. You’re just looking at these two factors: What am I buying? Who am I transacting with?
You have to be very careful about prohibited transaction rules. Sweat equity is not okay, and just be aware that at some point you may cross that line with taxability. You need to work with a good, strong team. Have somebody in the tax world who understands these implications and can work with you on them.
You really can’t afford to deal with less than IRA experts when planning for your retirement: it’s just too important, and the laws covering IRAs can very complex. Put David and the entire team of professionals at Equity Advantage on your side today. Call to get started, 503-619-0223!