Self Directed Roth IRA used for Wholesaling Real Estate

[Greg Bonhotal]

At a recent one day guru seminar, they seemed to indicate that a Self Directed Roth IRA could be used by a wholesaler to pay the down payment to a distressed seller when putting their home under contract.

They used the example of $100 Paid to seller from the Self Directed Roth IRA, then when the contract is resold, the money from the buyer of the contract would be paid directly into the Roth IRA, at closing.

So a $100 investment would return $5000 to $10,000 in theory.

This seemed too good to be true, but I had to ask.

It seems to indicate there would be no practical limit to how much you could add to a Roth IRA in a year.

It also seems to indicate that all the proceeds from wholesaling would never really be taxed.

If this is not allowed, Is there a best practice for Wholesaling in a Self Directed Roth IRA for most ALLOWED benefit?

I am new to investing, and apologize if this is a crazy question.

Thank you for all you teach me on Bigger Pockets!

P.S I didn't buy the Course.

[Brian Eastman]

@Greg Bonhotal

Ahh, gurus!  Gotta love them.  I bet they also said somewhere "We are not your attorney or CPA so don't take anything we say as tax or legal advice."  CYA.

There are several problems with this concept.

1) Self-dealing. Wholesaling takes a lot of hustle. As a disqualified person to your IRA, you can administer investments, but you cannot add value to the IRA via the provision of goods or services. The IRS could very easily find that all the door knocking and hustling and negotiating that goes into creating wholesale deals constitutes the provision of services and therefore a prohibited transaction with severe tax consequences. It is possible to fund wholesale opportunities without "You being the wholesaler" so that things can be done at arm's length, but...

2) Wholesaling is considered a dealer activity and therefore something that produces trade or business income. When a tax-exempt entity engages in a trade or business on a regular or repeated basis (vague wording meaning "the IRS gets to decide if they audit you"), then the IRA is subject to taxation on Unrelated Business Taxable Income. The tax rates can quickly scale to 37% of the gains your IRA creates, with the tax paid by the IRA. The intent of this tax is to level the playing field so that taxable businesses are not placed at an unfair disadvantage when tax-exempts compete with them.