Partnering on a Flip using SDIRA

[Eulogio Villasenor]

I am partnering on a fix and flip using my SDIRA. We are still in the process of closing on the property. My partner and my SDIRA will be partial owners of the property.

My partner will then use their money to pay for the renovations and when we sell we will have a 75/25 split in profit. Them getting the 75 because they will be doing the work and funding the rehab.

Is there anything wrong with doing this? I just want to make sure that everything is legal.

[Brian Eastman]

@Eulogio Villasenor

You should probably stop and get some qualified counsel on board.

There is risk in what you propose, though there is risk in any investment.  Controlling that risk with knowledge and good contracts is prudent.

From an IRA perspective, there is also a concern. Flipping is a trade or business. When a tax exempt entity like an IRA engages in a trade or business on a regular or repeated basis the gains become subject to taxation as Unrelated Business Taxable Income (UBTI). This is a topic to review with your SDIRA custodian. One flip is probably not a concern, but using this strategy with regularity could be problematic.

An IRA is designed to receive passive income like dividends, interest, rent from real property, etc. Perhaps being a lender to this flipper would be lower risk and more in line with IRS rules for IRA plans.