Flipping Houses Using Your Self-Directed IRA

flipping iraFlipping property is an increasingly appealing option, not only for investors but for everyday people. With the economic recovery and accompanying rebound in home prices, as well as the slowdown in new-home construction, flipping is a prime investment opportunity in many markets across the board. There is good money to be made in the business of acquiring homes that are distressed (usually in physical condition or even financial distress), rehabilitating those homes, and then, in turn, reselling the property to a buyer, or even to another investor looking for a cash-flow rental property.

Familiarize Yourself with Self-Directed IRA Rules

  • Now, if you do elect to use a retirement account to hold real estate – whether you are flipping it or not – you need to keep some strict rules in mind:
  • You cannot stay overnight in the property – even for one night.
  • You cannot let your spouse, your children or parents, or any in-laws stay in the house.
  • You cannot use the house to benefit any advisor who works with you on your IRA.
  • You cannot rent the house to yourself, nor to any disqualified persons, even at market rates.
  • You cannot buy the property from or sell the property to your own IRA, nor may any disqualified persons mentioned above.
  • You cannot intermingle IRA and non-IRA funds.
  • You cannot take money out of the IRA unless you take it in the form of a distribution, which may be taxable. There may also be penalties involved for early withdrawals.
  • You cannot lend money to your self-directed retirement account, nor borrow from it.
  • Neither can any disqualified person mentioned above.
  • Your IRA cannot contract for goods and services with you, nor with any entity that you or any of the above-disqualified persons control. That means you cannot buy a property in an IRA and then hire yourself or your son-in-law to provide the landscaping or property management services.

Get Used to the Hands-off Approach

All the investments you make with you self-directed IRA must be done fully at arm’s length. What we mean by that is when it comes to flipping property, you will have to be comfortable with handling your investment at a distance. Your role will be to operate basically as a fund manager; making decisions, negotiating and executing contracts, selecting vendors, and conducting the financial transactions associated with your IRA through checkbook control, or through your IRA’s custodian. It’s also good to note that you cannot be directly involved in a hands-on sense, such as serving as contractor yourself. Hands off.

Learning About Leverage

Depending on the balance in your self-directed IRA, you may be able to flip real estate as an investment strategy by using cash for all of your purchase transactions, which is ideal. Doing so would certainly make the process go more quickly, and could potentially allow you to engage in more transactions and boost your returns.
But, if you choose to use leverage by borrowing money to purchase real estate for flipping, it’s important to understand that you may be incurring a current year tax liability because of that borrowing. Using leverage to make investments within an IRA can generate what’s known as “unrelated business taxable income.” And unlike other types of income, you generate with your IRA, unrelated business taxable income is not tax exempt.

Finally, if you’re considering flipping houses with your self-directed IRA, make sure to go into each transaction well educated and well prepared. Real estate investing (and flipping in particular) might be fun and exciting, but it’s still investing. So if you’re not already experienced with this type of investment, start with smaller transactions and proceed cautiously until you learn more, and grow as an experienced investor.

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