How do I buy building materials with a self-directed IRA?

Question

While trying to set up a self directed IRA for real estate investing the rep explained to me that I can’t go to Home Depot to buy building materials. He said I “ You have to stay out of Home Depot” OK, not off to good start with this guy! I’m like - this isn’t gonna work. I purposely live 3 minutes from Home Depot for a reason. He actually thinks I’m going to let a handyman select finishes? He went on to suggest that I have the contractor start a job buying everything he needs for the job with his own money and bill me later and then send him a check through their online interface.  - Not gonna happen  -

They don’t give me a checkbook or a debit card!  OR he said to give him a big check upfront to buy everything he needs and I’m like, no I don’t think so  - I’ll never see him again and the rep having no experience as a flipper had no clue how to go about paying for Home Depot materials with out giving the contractor Cart Blanche. He finished by telling me a self directed IRA might “not be a good fit since I can’t trust my contractor”. Ugh! There MUST be a better way. I need a recommendation for a custodian who is experienced in doing renovations using a self directed IRA and patient enough to explain how to work it. Thank you in advance.

Matt Devincenzo · Answer

This is not 'your' property, it is your IRAs which is an entity that you are prohibited from materially participating in. I have a SD IRA and have bought and sold two properties inside of it. The difficulties you are mentioning are minor. You may need to pay more for a more stable or trustworthy contractor that can either bill in arears (like a professional) or can be trusted with an retainer (like a professional) to go purchase...

Taylor L. · Answer

That's one of the problems with buying properties yourself in your SDIRA.

You need to look into the disqualified persons and prohibited transactions rules for SDIRAs, as well as checkbook control IRAs. Checkbook control doesn't change the rules at all, it just makes it easier for the SDIRA to fund transactions. While you're at it, learn about UBIT and UBTI.

I use my SDIRA to invest in syndicated multifamily and self storage. It avoids the potential problem of me having to run to Home Depot or what have you, because the whole property is handled by a sponsor from acquisition to sale. On the whole, custodians don't give a ton of guidance in my experience. Your best bet is to keep hunting down answers on your own.

This guy did save you from making a mistake and providing a service to the IRA, which could very well cause problems with the IRS later, so that's good. He definitely did you a solid.

Brian Eastman · Answer

@Karen Salem

I hate to say it, but you need a serious reality check.

Do not look for a different IRA custodian.  Rather, go find yourself a tax attorney or CPA who has expertise in the use of tax-sheltered retirement funds for alternative asset investing.  Let them tell you what the IRS rules are and help you design a strategy that works within those rules.  Then, and only then, should you consider establishing a plan and finding a service provider that can serve your needs.

A self-directed IRA or Solo 401(k) is not a means for YOU to invest in real estate and have access to tax-sheltered capital for the purpose.

Rather, these vehicles are a means for you to deploy your tax-sheltered retirement savings into investments that are more diversified in nature and perhaps align with expertise you may have in a specific asset class.  As a disqualified person to your IRA, you may perform very basic and limited administrative activities, but you may not personally benefit nor may you inject value into the IRA via the provision of goods or services.  You get to be a "fund manager" so to speak, and that is all.

You can vent about the IRS rules all you want, but they are what they are.  Violating those rules has catastrophic tax consequences, so you just don't want to go there.

Dmitriy Fomichenko · Answer

@Karen Salem, happy to help, I will send you a private message!

Karen Salem · Answer

@Dmitriy Fomichenko I would really appreciate your help in determining how to grow my money which is currently just sitting in in a IRA money market account with Synchronicity because I got nervous having it in the stock market and rolled-it over there to be safe. Now I just want an experienced investment advisor / custodian who can set this up for me in a way that plays by the rules and will benefit me more than the stock market. I looked at your web site and did a little research about your company and I’d like to discuss this over a call today if possible. Please reach out to me. Thanks

Dmitriy Fomichenko · Answer

@Karen Salem

As a real estate agent you are considered to be "self-employed" and will qualify for a truly self-directed Solo 401k plan. This vehicle does not require a custodian and will provide you with "checkbook control" over your retirement funds. Once it is set up you can open a checking account for your 401k Trust and have a checkbook and debit card. This is very helpful discussion on the topic where you can learn a lot more:

https://www.biggerpockets.com/...

However, while this vehicle has significant advantages over self-directed IRA and gives you much greater flexibility and control, you still must abide by the IRS rules. Some of the potential pitfalls have been elaborated above, but here is a direct link to the IRS rules explaining the details:

https://www.irs.gov/retirement...

I understand your disappointment after your conversation with the custodian and broken expectations. However I suggest that you take the time to understand the IRS rules pertaining to self-directed IRA/401k, then follow and embrace them. Your strategy may need some adjustment (to comply with the IRS rules), talk with some experts who can provide you the guidance needed, but the bottom line is you can successfully invest your retirement funds in real estate, tax deferred!

Let's use the illustration of driving a car to help you understand the concept. As a real estate agent you probably drive a lot to meet with buyers, show properties, etc. When you get in your car and drive off your driveway - you have to follow the traffic rules such as: when you come to a stop sign - you have to stop, when you come to the red light - you have to stop and wait for the green light in order to turn left, you have to drive on the right side of the road - you can't drive on the left side. If you don't follow these rules - you will get fined, can get someone killed or be killed yourself. You may say "screw the car and those rules, I will not use the car and walk instead". Would that be wise? No!! You can accomplish so much more, in a fraction of the time, by driving the car and abiding by the rules, rather than walking.

So when it comes to retirement accounts: learn and understand the rules, abide by the rules. And join those who successfully utilize these vehicles to invest and build wealth tax-deferred or tax-free (using Roth).

Hope this helps!

Karen Salem · Answer

@Matt Calhoun I’m not quite grasping this. I’d like to buy in your area BTW

Karen Salem · Answer

@Matt Devincenzo you’re right. Finding that isn’t easy. Even contractors who came highly recommended flake out on me sometimes and I’m in a new area where I just moved and don’t have a relationship with any contractors now

Matt Calhoun · Answer

Hello @Karen Salem, Definitely speak to a professional CPA or Tax advisor in the SDIRA space, so they can guide you in the direction you would like to go. From what is described in your post, Checkbook control/ IRA LLC would help alleviate the pain points you mentioned. There is nothing that prohibits you from picking finishes or shopping at Home Depot. The issue is related to the feasibility of the custodian correctly issuing payments/ investment expenses, and Home depot wanting an immediate payment.

Karen Salem · Answer

@Taylor L. Thanks Taylor for your insight. Everyone made this sound so easy. It’s not. I’m a Florida Real Estate Agent so I constantly come across deals and wanted to take this money out of the stock market since I know nothing about that and put into buying a rental. I’m getting a lot of conflicting information about the rules. First, someone told me you can’t manage the property yourself  and would be required to hire a manager. He’s saying not true. That’s good because I want to Manage. Second I can’t conceive how I’m supposed to pull off doing a renovation with out picking finishes and buying materials. Maybe I am supposed to select and give the contractor a list of things to buy. IDK I thought I’d spent enough time studying this and was ready to go but now I’m hit with a whole set of obstacles. I’m really not a hands-off type investor. I’ve always renovated, managed or sold my own properties just fine.

How do I buy building materials with a self-directed IRA?

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