07 Aug Investing in Raw Land with a Self-Directed IRA: A Practical Overview
Yes! You can buy any type of real estate, including raw land, with a Self-Directed IRA or 401K. It is completely legal and has been permissible since 1974 and, despite what you may have heard, you are not subject to any taxes or penalties for doing so.
The first step is to establish a Self-Directed IRA with a company that specializes in alternative asset custodial services instead of a stock market focused brokerage firm. The entire process of establishing a Self-Directed IRA takes about two weeks by the time you have opened an account and funded it via an IRA transfer or rollover.
Now that you know that investing in raw land with your Self-Directed IRA is an option, let’s review the basics of how it works within various raw land strategies.
The most practical way to perceive a Self-Directed IRA is as a tax-favored funding vehicle for your retirement goals. Since retirement accounts are designed for long-term wealth creation, any asset that encompasses a long-term time horizon is a perfect fit. Think illiquid assets. Raw land strategies complement a Self-Directed IRA perfectly for this reason.
3 Common Strategies Implemented by Self-Directed IRA Investors Considering Raw Land
Buy and Hold: Raw land investors are typically expecting a higher appreciation over the course of many years, so a buy and hold strategy could work extremely well. The Self-Directed IRA will only need to cover minimal property tax expenses and not much else over the course of the investment. This option can be executed by an investor that has enough cash in their Self-Directed IRA to purchase 100% of the desired parcel or via a partnership by which the IRA investor allocates a portion of their IRA money into the deal for a fractional ownership of the parcel. When the parcel of land is sold, all proceeds must be returned to the Self-Directed IRA account. No taxes!
Land Flipping: This strategy is a great fit for Self-Directed IRA account holders that have a lower account balance (less than $75,000) and/or are seeking higher short-term appreciation. The United States is covered with under-valued, highly desirable land. Most of these parcels are found slightly beyond city limits where real estate development hasn’t yet reached, but is imminent. With a relatively low investment, land can be purchased and quickly flipped for lucrative returns. Best of all, since the investment is being funded by a Self-Directed IRA, no short-term capital gains will be due on the realized profits. That alone can increase your return on investment by as much as 35%!
Raw Land Development: This strategy is typically implemented by investors that truly understand how to add value to a piece of raw land by obtaining beneficial land use rights, entitlements, easements, utility improvements and segmenting into various parcels to position the land for additional development. The execution of this strategy is more complicated and requires investors with specialized expertise and a higher capital commitment. Consider partnering your Real Estate IRA with others if this type of investment is what interests you.
A Self-Directed IRA’s immense flexibility is what makes it such a powerful wealth building vehicle
Self-Directed IRAs can be utilized to fund land deals in three ways:
100% cash acquisition with your Self-Directed IRA
Partnering your Self-Directed IRA with other investors using common legal structures like a Limited Liability Company (LLC) or a Limited Partnership (LP)
Leveraging your Self-Directed IRA through a non-recourse loan
Let’s cover how maintenance is handled within Self-Directed IRAs. All expenses due on a piece of raw land must be paid directly out of the IRA in direct proportion to its ownership in the deal. For example, if your Self-Directed IRA purchases 100% of a parcel of land, your IRA must pay 100% of any and all expenses that may arise for said property. Therefore, it is important that you budget accordingly and ensure that your IRA has enough money to not only buy the property, but to also maintain the property.
Self-Directed IRA fees are relatively inexpensive, typically only about $250-$400 annually. It is important that you understand that traditional brokerage firms and banks do not offer truly Self-Directed IRAs and your brokerage firm will not allow you to buy land while your account is being managed by their firm. Be aware, whether intentional or not, most trusted advisors like financial planners, CPAs and attorneys are misinforming the public that purchasing real estate within your IRA is not an option without incurring a tax penalty or having to withdraw money from the IRA first. You now know that is simply not true.
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