SD IRA why not for flippers?

[Samuel Ksiazkieicz]

Hey guys;

I have seen a good amount of posts on the subject of buying rental/long term properties with a SD IRA. I apologize if this has already been covered (deployed right now and internet is slow, so I havent been able to open all the pages) but it seems to me that using an SD IRA is best suited for investing strategies that produce short term gains, i.e. flipping etc. As has been discussed in other threads, landlording, buy and hold all already have tax benefits associated i.e. depreciation, long term cap gains, etc etc. Am I missing something, or why arent people people writing about using SD IRAs for flipping?

In my mind here is how it would play out;
Due to the fact that I am late 20s with the $5k cap per year, my IRA doesnt have enough to purchase a home outright (well maybe in Detroit, not in SoCal). Therefore I gain the deed through sub2 or a lease option. 100k house, I pay the lessor 10k for the option. Turn around and list it for 130k. That profit returns to my roth account, thereby increasing it by 20k of tax free gains.

Am I missing something or doesnt it make more sense to use SD IRA for short term type purchases?

Thanks

[Will Barnard]

Flipping in an IRA or any qualified retirement plan is certainly possible and is actively completed by investors. The key factor you need to realize is that flipping, as like with any other competing business such as a donut shop, income is subject to UBIT which is a very complicated form of taxation on retirement accounts. The tax was implemented to "level the playing field" so that the tax advantaged company would not have advantages over non tax advantaged companies. For instance, if your IRA owns a donut shop and does not have to pay income tax, that shop could sell donuts for slightly less than all the competition who does have to pay income tax, thus placing the IRA business at an advantage.

If you flip in an IRA, you will incur UBIT. However, paying this tax may or may not be the worst thing in the world. In an example where an IRA had only $10k in it and those funds were used to flip or wholesale a deal, it is very possible that $10k could be made on that $10k investment, tus returning 100% gross profit. After paying UBIT, the return would still be very high, so while you must conuslt with your CPA regarding UBIT implications, if you must pay them, simply make sure the net profit is worth it to the tax advantaged account.