Using a self directed IRA for rehab.

[Greg Wright]

Has any rehabber used a self directed IRA for rehabbing houses? How do you handle the profit. Does it have to go back into the IRA which would seem to defeat the purpose as you couldn't make any money to live off. If you keep the profit out does it get taxed at a higher rate than normal or is there a penalty? Thanks for any input.

[Will Barnard]

Originally posted by @Greg Wright:

Jon,

Can I keep that $13771.30 out of the IRA.

No you can't without paying the taxes plus the 10% additional early withdrawal penalty. Any profits or income from IRA investments must go back into the IRA account. Think of the account as another person. You certainly can not go into another person's bank account and withdraw funds without consequencs.

DISCLAIMER TO ALL READERS: There are several incorrect statements in this thread, readers should be advised to consult a tax professional knowledgable in retirement account (specifically self directed varieties) tax rules and law including UBIT.

In the example of the father in law having a 403b, your wife, the account holder's daughter, is a disqualified party and as such, these funds can not be invested into YOUR rehab projects.

You do NOT need, nor are you "required" to have an LLC for self directed IRA's where you want to invest in rehab flips or any other investment for that matter. Also, the statement that you are required to have it to avoid self dealing or scrutiny by the IRS is also incorrect.

The comments regarding "arms length transactions" is 100% correct and spot on. That means you can not self deal (invest IRA funds from your account into properties you own) and you can not invest those funds with any disqualified parties.