SD IRA Investing In Buy n Holds

[Toby Jurging]

Seeking input regarding use of SD IRA funds for REI. Have been using my SD IRA funds for funding flips over the past year, completing 3 with success. I have no issue with this method, easy enough on my end, so no complaints.

I have been looking into more BnH as to diversify, as well as looking to future. Understand that I can create an SD IRA LLC and go that route. But, seems to have drawbacks; fewer lenders, higher rates, non recourse loans, more down, etc.

So the question is, does anyone out there have advice, recommendations for how to invest in BnH (more specifically MF) using SD IRA funds? (other than that mentioned above, higher rate, etc) More specifically, investing with a partner that is the business side of partnership?

[Jim Kittridge]

Originally posted by @Dmitriy Fomichenko:

@Jim Kittridge

Flipping is considered an active business. Income from active business inside of an IRA is subject to Unrelated Business Income Tax (UBIT). Generally not a good idea to do this inside of a retirement account.

Rental income from an investment property is considered passive and will be sheltered from taxes in a self-directed IRA. 

You are not required to have a property manager for your IRA-owned property, but you are limited which functions you can perform. As "disqualified person" you are prohibited from providing any services to your IRA but allowed to perform basic administrative functions. For example: you can decide which plumber to send to fix the leak, pay the plumbing bill, pay property taxes, shop for insurance, etc. You are not allowed to paint the house, repair the roof or any other "sweat equity" labor. But it would be best to have a third party property manager handle all of those tasks for you.

If the property is financed, the income from financed portion of the property considered Unrelated Debt Finance Income (UDFI), which is subject to UBIT. 

Leveraged property in a truly self-directed Solo 401k is exempt from UBIT.  

 Thanks for clarifying Dmitriy. It’s much appreciated.