Roth IRA option to flip houses

[Nicholas Armstrong]

Hello everyone,

I was just going to see how many of you have done a Roth IRA option to flip houses?

I've heard this is a great way to expedite the growth of your retirement account but I'm wondering how to technically do this?

[Brian Eastman]

@Nicholas Armstrong

Flipping houses with an IRA can be a very profitable opportunity, but there are some specific considerations and you will want to be sure to enlist professional guidance.

A checkbook IRA LLC will be the best plan option for this type of investing. An IRA held by a trust company as custodian will kill you with paperwork, processing delays and transaction fees.

All of the activities must be for the exclusive benefit of the IRA. You can administer the IRA's investment into the transaction and do things like negotiate, sign contracts and handle expense/income transactions on behalf of the plan. You may not personally benefit in any way such as compensation or personal use of the property, nor may you add value to the IRA through the provision of goods or services. The IRA will pay for all expenses and receive all income.

Flipping houses is considered a trade or business activity. If an IRA (or any tax exempt entity) engages in a trade or business on a regular or repeated basis, there is a tax known at UBIT that applies. This is a hefty trust-tax rate. As such, there are three ways to approach flipping opportunities with an IRA.

1) Have the IRA fund the flip and receive the profits. Pay UBIT tax that can be as high as 39%, but walk away knowing that your after-tax return was superior to other ways you could have invested the IRA. It is very possibly to generate after-UBIT returns to your IRA in excess of 25% if you do the right deals.

2) Have the IRA be the bank. Rather than have equity participation in the flip, and therefore UBIT exposuire. Use the IRA to lend money to other investors flipping houses. 2 points and 12% interest is pretty common, and that is not a bad return for your IRA with a lot less headache than actually doing the flip.

3) Buy, fix, rent, then sell later.  By holding the property as a rental for more than a year, the nature of the transaction is changed from trade or business to passive rental.  When you then sell the rental, it is more of a portfolio reallocation with no tax implications, and not subject to UBIT.