Nov 09

Rules for a Self-Directed IRA when Investing in Real Estate

A Self-Directed IRA LLC offers one the ability to use his or her retirement funds to make almost any type of investment on their own without requiring the consent of any custodian or person. The IRS and Department of Labor only describe the types of investments that are prohibited, which are very few.

The basis of the prohibited transaction rules are based on the premise that investments involving IRA and related parties are handled in a way that benefits the retirement account and not the IRA owner. The rules prohibit transactions between the IRA and certain individuals known as “disqualified persons”. These rules can be found in Internal Revenue Code Section 4975. In general, the definition of a “disqualified person” (Internal Revenue Code Section 4975(e)(2)) extends into a variety of related party scenarios, but generally includes the IRA holder, any ancestors or lineal descendants of the IRA holder, and entities in which the IRA holder holds a controlling equity or management interest.

Rules for a Self-Directed IRA when Investing in Real EstateThe IRS permits using a Self-Directed IRA LLC to purchase real estate or raw land. Since you are the manager of the Self-Directed IRA LLC, making a real estate investment is as simple as writing a check from your Self-Directed IRA bank account. The advantage of purchasing real estate with your Self-Directed IRA LLC is that all gains are tax-deferred until a distribution is taken. In the case of a Roth Self-Directed IRA, all gains are tax-free.

For example, if you purchased a piece of property with your Self-Directed IRA LLC for $100,000 and you later sold the property for $300,000, the $200,000 of gain appreciation would generally be tax-deferred. Whereas, if you purchased the property using personal funds (non-retirement funds), the gain would be subject to federal income tax and in most cases state income tax.

When it comes to using a self-directed IRA to purchase real estate, there are a number of rules that should be followed in order to make sure the real estate IRA investment does not violate any of the IRS prohibited transaction rules.

  • The deposit and purchase price for the real estate property should be paid using Self-Directed IRA LLC funds or funds from a non-disqualified third-party
  • No personal funds or funds from a “disqualified person” should be used
  • All expenses, repairs, taxes incurred in connection with the Self-Directed IRA real estate investment should be paid using retirement funds – no personal funds should be used
  • If additional funds are required for improvements or other matters involving the real estate investments, all funds should come from the Self-Directed IRA or from a non “disqualified person”
  • If financing is needed for a real estate transaction, only nonrecourse financing should be used. A nonrecourse loan is a loan that is not personally guaranteed and whereby the lender’s only recourse is against the property and not against the borrower.
  • The IRA holder or “disqualified person” in connection with the real estate investment should perform no services in connection with the use of self-directed IRA LLC. In general, other than standard management type of services (necessary and required tasks in connection with the maintenance of the LLC), no active services should be performed by the LLC manager or a “disqualified person” with respect to the real estate transaction.
  • Title of the real estate purchased should be in the name of the Self-Directed IRA LLC. For example, if Joe Smith established a Self-Directed IRA LLC and named the LLC XYZ, LLC, title to real estate purchased by Joe’s Self-Directed IRA LLC would be as follows: XYZ LLC
  • Although the use of a nonrecourse loan is permitted with a self-directed IRA when buying real estate, the use of a nonrecourse loan would impose a tax pursuant to IRC 514 on a percentage of the income generated by the IRA investment based off a percentage of the debt used in proportion to the amount of cash invested.
  • Keep good records of income and expenses generated by the real estate investment
  • All income, gains or losses from the Self-Directed IRA LLC real estate investment should be allocated to the IRA and be returned to the IRA LLC bank account
  • Make sure you perform adequate diligence on the property you will be purchasing especially if it is in a state you do not live in
  • Make sure you will not be engaging in any self-dealing real estate transaction which would involve buying or selling real estate that will personally benefit you or a “disqualified person”
  • If you need to make additional IRA contributions to your self-directed IRA, the contribution should be made to the IRA custodian/administrator and then the funds will be transferred to the IRA LLC.

Using a self-directed IRA LLC to buy real estate is quick and easy, however, there are a number of IRS rules and potential tax issues that must be addressed before making the self-directed IRA real estate investment.

For more information on using a self-directed IRA LLC to buy real estate, please contact a tax professional at 800-472-0646.

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Sep 29

IRA Financial Group Announces List of Most Popular Investments for Self-Directed IRA Clients For 2017

Cryptocurrency and real estate were the two most popular self-directed IRA investments for 2017

IRA Financial Group, the leading provider of “checkbook control” self-directed IRA LLC and Solo 401(k) plan solutions, announces the top three most popular self-directed IRA investments for clients for 2017, which were cryptocurrency, real estate, and hard-money lending. “In 2017 we saw a huge amount of interest in clients looking to use their self-directed IRA to buy bitcoins and real estate,” stated Adam Bergman, a partner with the IRA Financial Group.

The primary advantage of using a self-directed IRA LLC to make investments, such as real estate, is that an investment can be made by simply writing a check. In addition, all income and gains associated with the IRA investment grow tax-deferred and return to the IRA LLC.

With IRA Financial Group’s self directed IRA LLC solution, traditional IRA or Roth IRA funds can be used to buy real estate throughout the United States and globally in a tax-deferred account by simply writing a check and without the need of custodian consent or high custodian fees.

 IRA Financial Group Announces List of Most Popular Investments for Self-Directed IRA Clients For 2017IRA Financial Group’s Self-Directed IRA LLC for real estate investors, also called a real estate IRA with checkbook control or a Self-Directed real estate IRA, is an IRS approved structure that allows one to use their retirement funds to make real estate and other investments tax-free and without custodian consent. The Self-Directed IRA LLC involves the establishment of a limited liability company (“LLC”) that is owned by the IRA (care of the Roth IRA custodian) and managed by the IRA holder or any third-party. As a result, the Self-Directed IRA LLC provides the retirement account holder with greater control over his or her retirement assets allowing the individual to make traditional as well as non-traditional investments, such as real estate tax-deferred and with much lower annual fees.

The IRA Financial Group was founded by a group of top law firm tax and ERISA lawyers who have worked at some of the largest law firms in the United States, such as White & Case LLP, Dewey & LeBoeuf LLP, and Thelen LLP.

IRA Financial Group is the market’s leading provider of self-directed IRA LLC and Solo 401(k) plans. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate without custodian consent.

To learn more about the IRA Financial Group please visit our website at http://www.irafinancialgroup.com or call 800-472-0646. To learn more about establishing a self-directed IRA account with the IRA Financial Trust Company please visit http://www.irafinancialtrust.com or call 800-472-1043.

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Sep 18

The UBTI Rules when Using a Self-Directed IRA to Flip Houses

With a Self-Directed IRA with checkbook control, flipping homes or engaging in a real estate transaction is as simple as writing a check. As manager of your Self-Directed IRA LLC, you will have the authority to make real estate investment decisions on behalf of your IRA on your own without needing the consent of an IRA custodian. One of the true advantages of a checkbook control IRA is that when you want to purchase a home with your self-directed IRA, you can make the purchase, pay for the improvements, and even sell or flip the property on your own without involving the IRA custodian.  And the best part is that all gains generated from the house flipping transaction will flow back to the IRA LLC tax-free!

The UBTI Rules when Using a Self-Directed IRA to Flip HousesWhen engaging in real estate transactions, such as a house flipping transaction, one must keep in mind the Unrelated Business Taxable Income Rules (also known as UBTI or UBIT).

The purpose of the UBTI or UBIT rules is to treat tax-exempt entities, such as charities, IRAs,and 401(k)s as a for-profit business when they engage in active business activities or use leverage.

The UBTI or UBIT rules generally applies to the taxable income of “any unrelated trade or business…regularly carried on” by an organization subject to the tax. The regulations separately treat three aspects of the quoted words—“trade or business,” “regularly carried on,” and “unrelated.”

  • Trade or Business: In defining “unrelated trade or business,” the regulations start with the concept of “trade or business” as used by Internal Revenue Code Section 162, which allows deductions for expenses paid or incurred “in carrying on any trade or business.”
  • Regularly Carried On: The UBIT or UBIT rules generally only applies to income of an unrelated trade or business that is “regularly carried on” by an organization. Whether a trade or business is regularly carried on is determined in light of the underlying objective to reach activities competitive with taxable businesses. The requirement thus is met by activities that “manifest a frequency and continuity, and are pursued in a manner generally similar to comparable commercial activities of nonexempt organizations.” The determination of whether an activity is “regularly carried on” is generally a fact and circumstances test and is based on the particular facts of the transaction or set of transactions during the year.
  • Unrelated: In the case of an IRA or 401(k) Plan, any business activity will be treated as “unrelated” to its exempt purpose.

In the case of an IRA or 401(k) plan, a transaction would not trigger the UBTI or UBIT rules if the transaction is deemed not to be considered a trade or business that is regularly carried on. This typically involves passive types of activities that generate capital gains, interest, rental income, royalties, and dividends. The passive income exemptions to the UBTI or UBIT rules are listed in Internal Revenue Code Section 512. However, if the tax-exempt organization engages in an active trade or business, such as a restaurant, store, or manufacturing business, the IRS will tax the income from the business since the activity is an active trade or business that is regularly carried on.

How does the UBTI Rules Apply to Flipping Homes?

The question is then asked, what level of real estate transaction must one cross before triggering the UBTI or UBIT tax.  Unfortunately, there is no clear test as to how many house flipping transactions or the number of real estate transactions one must engage in a given year in order to trigger the UBTI or UBIT tax.  In general, the IRS has a number of factors it will examine to determine whether one has engaged in a high enough volume or real estate transactions, such as home flipping, to trigger the UBTI or UBIT tax.  Firstly, the IRS will examine the frequency of the transactions – how many flipping transactions are done in a year.  Secondly, the IRS will examine the intent of the person – was the person intending to engage in an active trade or business.  Thirdly, the IRS will also look at the scope of other activities of the tax-exempt entity to determine whether the activity is part of a business activity or an investment.

The determination of whether an activity is an active trade or business and will, thus, trigger the UBTI or UBIT tax, which is taxed at a rate of approximately 40% for 2017, depends on the facts and circumstances.  Clearly one or two flipping transactions would not be considered an active trade or business and would, thus, not trigger the UBTI or UBIT tax. The question then becomes what happens if you do 3,4, or even 10 flipping transactions in a year – would that be considered an active trade or business and, hence, trigger the UBTI tax? Again, one must examine all the facts and circumstances surrounding the multiple house flipping transactions in order to determine whether the transactions in the aggregate would constitute an active trade or business. Therefore, it is important to work with a tax professional who can help one evaluate the transaction to determine whether the flipping transaction will trigger the UBTI or UBIT tax.

To learn more about the advantages of using a Self Directed IRA LLC to purchase real estate and flip homes tax-free, please call an IRA Expert at 800-472-0646 or visit www.irafinancialgroup.com.

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Sep 05

Making Investments with Your Self-Directed IRA

A Self-Directed IRA LLC offers one the ability to use his or her retirement funds to make almost any type of investment on their own without requiring the consent of any custodian or person. The IRS and Department of Labor only describe the types of investments that are prohibited, which are very few.

The foundation of the prohibited transaction rules are based on the premise that investments involving IRA and related parties are handled in a way that benefits the retirement account and not the IRA owner. The rules prohibit transactions between the IRA and certain individuals known as “disqualified persons”. The outline for these rules can be found in Internal Revenue Code Section 4975. In general, the definition of a “disqualified person” (Internal Revenue Code Section 4975(e)(2)) extends into a variety of related party scenarios, but generally includes the IRA holder, any ancestors or lineal descendants of the IRA holder, and entities in which the IRA holder holds a controlling equity or management interest.

The following are some examples of types of investments that can be made with your Self-Directed IRA LLC

  • Residential or commercial real estate
  • Domestic of foreign real estate
  • Raw land
  • Foreclosure property
  • Mortgages
  • Mortgage pools
  • Deeds
  • Private loans
  • Tax liens
  • Private businesses
  • Limited Liability Companies
  • Limited Liability Partnerships
  • Private placements
  • Precious metals and certain coins
  • Stocks, bonds, mutual funds
  • Foreign currencies

Real Estate

The IRS permits using a Self-Directed IRA LLC to purchase real estate or raw land. Since you are the manager of the Self-Directed IRA LLC, making a real estate investment is as simple as writing a check from your Self-Directed IRA bank account. The advantage of purchasing real estate with your Self-Directed IRA LLC is that all gains are tax-deferred until a distribution is taken (pre-tax 401(k) distributions are not required until the IRA holder turns 70 1/2). In the case of a Roth Self-Directed IRA, all gains are tax-free.

For example, if you purchased a piece of property with your Self-Directed IRA LLC for $100,000 and you later sold the property for $300,000, the $200,000 of gain appreciation would generally be tax-deferred. Whereas, if you purchased the property using personal funds (non-retirement funds), the gain would be subject to federal income tax and in most cases state income tax.

Helpful Tips :

  • The deposit and purchase price for the real estate property should be paid using Self-Directed IRA LLC funds or funds from a non-disqualified third-party
  • No personal funds or funds from a “disqualified person” should be used
  • All expenses, repairs, taxes incurred in connection with the Self-Directed IRA real estate investment should be paid using retirement funds – no personal funds should be used
  • If additional funds are required for improvements or other matters involving the real estate investments, all funds should come from the Self-Directed IRA or from a non “disqualified person”
  • If financing is needed for a real estate transaction, only nonrecourse financing should be used. A nonrecourse loan is a loan that is not personally guaranteed and whereby the lender’s only recourse is against the property and not against the borrower.
  • With a Self-Directed IRA the use of a nonrecourse loan would be subject to tax pursuant to Internal Revenue Code Section 514, which would not be the case with a Solo 401(k) Plan. This provides a very exciting investment opportunity for a self-employed individual or small business owner who is eligible for a Solo 401(k) Plan.
  • No services should be performed by the IRA holder or “disqualified person” in connection with the real estate investment. In general, other then typical trustee type of services (necessary and required tasks in connection with the maintenance of the plan), no active services should be performed by the plan participant or a “disqualified person” with respect to the real estate transaction.
  • Title of the real estate purchased should be in the name of the Self-Directed IRA LLC. For example, if Joe Smith established a Self-Directed IRA LLC and named the LLC XYZ, LLC, title to real estate purchased by Joe’s Self-Directed IRA LLC would be as follows: XYZ LLC
  • Keep good records of income and expenses generated by the real estate investment
  • All income, gains or losses from the Self-Directed IRA LLC real estate investment should be allocated to the IRA
  • Make sure you perform adequate diligence on the property you will be purchasing especially if it is in a state you do not live in
  • Make sure you will not be engaging in any self-dealing real estate transaction which would involve buying or selling real estate that will personally benefit you or a “disqualified person”

Tax Liens

The IRS permits the purchase of tax liens and tax deeds with a Self-Directed IRA. By using a Self-Directed IRA to purchase tax-liens or tax deeds, your profits are tax-deferred back into your retirement account until a distribution is taken (pre-tax IRA distributions are not required until the Plan Participant turns 70 1/2). In the case of a Roth Self-Directed IRA, all gains are tax-free.

More importantly, with a Self-Directed IRA, you, as manager of the Self-Directed IRA LLC, will have “checkbook control” over your retirement funds allowing you to make purchases on the spot without custodian consent. In other words, purchasing a tax-lien or tax deed is as easy as writing a check!

Helpful Tips :

  • The deposit and purchase price for the tax lien should be paid using Self-Directed IRA funds or funds from a non-disqualified third-party
  • No personal funds or funds from a “disqualified person” should be used
  • A check from the Self-Directed IRA account should be taking to auction or used for the tax lien purchase – no personal check or cash should be used
  • No credit card should be applied for in the name of the Self-Directed IRA as that would violate the IRS prohibited transaction rules. A pure debit card is allowable
  • All income, gains or losses from tax lien investments should be allocated to the Solo 401(K) Plan

Loans & Notes

The IRS permits using IRA funds to make loans or purchase notes from third parties. By using a Self-Directed IRA to make loans or purchase notes from third-parties, all interest payments received would be tax-deferred until a distribution is taken (pre-tax IRA) distributions are not required until the Plan Participant turns 70 1/2). In the case of a Roth Self-Directed IRA, all gains are tax-free.

For example, if you used a Self-Directed IRA to loan money to a friend, all interest received would flow back into your Self-Directed IRA tax-free. Whereas, if you lent your friend money from personal funds (non-retirement funds), the interest received would be subject to federal and in most cases state income tax.

Helpful Tips :

  • The loan or note amount should be paid using Self-Directed IRA funds or funds from a non-disqualified third-party
  • No personal funds or funds from a “disqualified person” should be used in the loan transaction
  • The loan or note should not involve a “disqualified person” directly or indirectly
  • The loan or note should have a stated interest rate of at least Prime as per the Wall Street Journal (4.25% as of 6/23/17)
  • All interest and principal associated with the loan or note should be allocated to the Self-Directed IRA
  • It is good practice to have the loan terms documented in a promissory note or loan agreement
  • If you will be acting as the lender, consider securing the loan with an interest or lien in an asset owned by the borrower
  • Make sure you will not be engaging in any self-dealing loan transaction which would involve a loan or note that will personally benefit you or a “disqualified person”

Private Businesses

With a Self-Directed IRA you are permitted to purchase an interest in a privately held business. The business to be purchased can be any entity other than an S Corporation (i.e. limited liability company, C Corporation, partnership, etc.). When investing in a private business using 401(k) funds, it is important to keep in mind the “Disqualified Person” and “Prohibited Transaction” rules under IRC 4975 and the Unrelated Business Taxable Income rules under IRC 512.

Helpful Tips :

  • The deposit and purchase price for the business should be paid using Self-Directed IRA or funds from a non-disqualified third-party
  • No personal funds or funds from a “disqualified person” should be used to purchase the business
  • The purchase of the stock or assets of the business should not directly or indirectly benefit the plan participant personally or any “disqualified person”
  • The purchase of a business operated via an LLC or partnership will potentially trigger the Unrelated Business Taxable Income rules under IRC 512 and a corresponding tax of approximately 40% for 2017 would be applied
  • Stock of an S Corporation should not be purchased with retirement funds as the S corporation rules only allow individuals to be S Corporation shareholders
  • The purchase of stock of a C Corporation would not trigger the application of the Unrelated Business Taxable Income rules under IRC 512
  • All income, gains or losses from the purchased business should be allocated to the Self-Directed IRA
  • The plan participant or any “disqualified person” should not have any ownership in the business being purchased and should not directly or indirectly personally benefit from the acquisition
  • Make sure to perform adequate diligence on the business you will be purchasing or investing in especially if you will be buying the stock/interests and not the assets
  • Make sure you will not be engaging in any business acquisition transaction which would involve buying or selling a business that will personally benefit you or a “disqualified person”

Precious Metals & Coins

The Self-Directed IRA structure allows for investments into precious metals and certain coins. The advantage of using a Self-Directed IRA to purchase precious metals and/or coins is that their values generally keep up with, or exceed, inflation rates better than other investments. In addition, IRS approved metals or coins, as defined under Internal Revenue Code Section 408(m) should be held an an approved depository or U.S. Bank.

Helpful Tips :

  • Only IRS approved metals or coins (bullion) may be purchases as per Internal Revenue Code Section 408(m)
  • The IRS approved precious metals or coins being purchased by the plan should be paid using Self-Directed IRA funds or funds from a non-disqualified third-party
  • With respect to IRS approved precious metals or coins(bullion), the metals or coins should not be held in the personal possession of any individual
  • With respect to the IRS approved precious metals or coins outlined in Internal Revenue Code Section 408(m), the bullion must be held in the “physical possession” of a U.S. depository or at a U.S. bank
  • An affidavit signed by the trustee of the plan confirming that the IRS approved precious metals or coins are being purchased and being held in the sole interest of the retirement account is good practice
  • All income, gains or losses from the purchased precious metals or coins should be allocated to the Self-Directed IRA
  • IRS approved precious metals or coins should not be held at a bank outside the United States
  • Perform adequate diligence on the dealer with which you will be transacting with for the purchase of IRS approved metals or coins

Foreign Currencies

The IRS does not prevent the use of IRA funds to purchase foreign currencies, including Iraqi Dinars. In fact, the Self-Directed IRA Plan structure permits the purchase of foreign currencies. Many believe that foreign currency investments offer liquidity advantages to the stock market as well as significant investment opportunities.

By using a Self-Directed IRA to purchase foreign currencies, such as the Iraqi Dinar, all foreign currency gains generated would be tax-deferred until a distribution is taken (pre-tax IRA distributions are not required until the Plan Participant turns 70 1/2). In the case of a Roth Self-Directed IRA, all gains are tax-free.

Helpful Tips :

  • Make sure you have a solid background in trading currencies – high volatile and significant risk
  • If you will be investing with a third-party, perform adequate diligence on the individual and make sure the individual has the knowledge to trade foreign currencies and all his/her securities licenses are in good standing.
  • Beware of leverage – it is allowable but it would trigger the application of the Unrelated Business Taxable Income rules under IRC 512 and thereby a corresponding tax
  • No personal guarantee of any leverage or loan obligation is permitted
  • All income, gains or losses from the foreign currency transactions should be allocated to the Self-Directed IRA

Stocks, Bonds, Mutual Funds, CDs

In addition to non-traditional investments such as real estate, a Self-Directed IRA may purchase stock, bonds, mutual funds, and CDs. The advantage of using a self-directed IRA is that you are not limited to just making these types of investments. With a Self-Directed IRA with “checkbook control” you can open a stock trading account with any financial institution as well as purchase real estate, buy tax liens, or lend money to a third-party. Your investment opportunities are endless! When purchasing stocks or securities with a Self-Directed IRA, all income and gains, including dividends, would flow back to the plan without tax. With a Roth Self-Directed, all gains are tax-free. Whereas, if you purchased stocks with personal funds, all income and gains would be subject to federal and in most cases state income tax would be subject to federal and in most cases state income tax.

Helpful Tips :

  • If you will be investing with a third-party, perform adequate diligence on the individual and make sure the individual has the knowledge to trade stocks or securities and all his/her securities licenses are in good standing.
  • Beware of promoters who are promising high returns and that do not work at reputable financial institutions – high likelihood of fraud
  • Beware of leverage – it is allowable but it would trigger the application of the Unrelated Business Taxable Income rules under IRC 512 and thereby a corresponding tax
  • No personal guarantee of any leverage or loan obligation is permitted
  • Open up a brokerage account in the name of the Self-Directed IRA – not a personal account
  • All income, gains or losses from the stock investments should be allocated to the Self-Directed IRA

If you have any questions about whether your specific Self-Directed IRA transaction would potentially be in violation of IRS rules, please contact a tax professional at the IRA Financial Group at 800-472-0646.

 

Aug 21

Purchasing Tax Liens with a Self-Directed IRA LLC

It’s a little-known fact that tax liens can be purchased with retirement account funds. By Self-Directing your IRA LLC investments into tax liens, your profits are tax-deferred back into your retirement account. More importantly, if you have full checkbook control over your Self-Directed IRA, the purchases can be made on the spot as fast as you can write a check. Tax Liens have been a lesser known and underappreciated money-maker, however learning how they can magnify your earnings in a tax-deferred IRA LLC will make them one of the soundest investments in your retirement account.

The purchase of tax lien certificates is a surprisingly safe investment. The transaction is fast and its characteristics make tax liens a perfect investment for the individual with full checkbook control of an IRA Financial Group IRA LLC. In fact, the use of a Self-Directed IRA LLC is one of the most tax efficient ways to finance your tax lien purchase. IRA Financial Group’s IRA LLC allows investors to participate in a wide range of investment vehicles including, but not limited to tax liens, real estate, mortgages, franchise, notes, stocks and mutual funds, partnerships, etc.

These unique IRS approved structures are created by IRA Financial Group’s in-house tax and ERISA professionals who personally customize your account structure to suit your needs. Only a handful of institutions are skilled in these specialized account structures and IRA Financial Group is the “gold standard” for Compliance, Leadership, Customer Service, and Technological Innovation.

Facts & Opportunities Surrounding Tax Liens

Real estate has long been considered one of the best (and safest) investment opportunities for both the large and small capitalist. Savvy investors know that the trick to making money in a downward spiraling market is to purchase properties for a fraction of their value. The question is…How? Many are finding the perfect answer in the high-profit possibilities of investing in Tax Lien Sales.

Purchasing Tax Liens with a Self-Directed IRA LLCWhen a property owner falls behind on their taxes, failing to pay for one or more years, the local taxing authority has the legal right to place a lien or repossess the property and sell it at auction to recoup the lost tax revenue. How long local authorities wait to seize individual properties, and how much they allow to be owed on it before one of these events is up to the lien laws in their particular area. In many cases properties may be acquired for a few thousand dollars, regardless of how much it’s actually worth! Similarly, paying off the lien on others may cost more than the house or land is worth. A savvy investor takes the time to research each property carefully prior to sale day.

Tax Lien Sales

Tax lien sales usually happen at public auctions once or twice a year, depending on the area in which it is located, and how many properties the government may seize annually for back taxes. Larger urban areas may hold monthly auctions, while smaller rural ones might only have one a year.

Types of Tax Liens

There are two types of tax lien sales through auction: the tax lien certificate; and the tax lien deed. Both can be a safe yet profitable opportunity for investors with checkbook control.

Tax Lien Certificate sales offer the delinquent homeowner one last chance to retain ownership of their property, by using third-party investment money to pay off the taxes and give them a bit more time to collect the money needed to pay their debt without the risk of losing their home. When an investor bids on a tax lien certificate, he is in essence agreeing to loan the homeowner the money needed to pay all taxes due. The homeowner, in turn, agrees to pay back the tax lien certificate holder – with interest – by a specified date. If the homeowner fails to pay the debt on time, the deed to the property is transferred to the investor for the amount paid on the taxes. Either way the investor makes a profit: either on the interest he earns on the loan; or by obtaining the property for a fraction of its value through the tax lien sale, and then reselling it.

Tax Lien Deed sales are handled a bit differently, since the investor is actually bidding (or buying), the complete property at the time of auction, with no responsibility to give the homeowner more time to pay his/her tax debt. Once the selling price is approved, the deed is automatically transferred to its new owner, giving the investor full reign as to what to do with the property next: renovate it; sell it as-is; or raze the existing house and build anew.

Investors usually pay more for properties in this type of tax lien sale, which may lower their profit margins compared to the acquisition of tax lien certificate properties. But, many investors prefer outright purchases to eliminate problems with current homeowners. Either way, investing in tax liens is a profitable and easy way to enter the real estate market in virtually any area.

How Much Money Can I Make and How?

1. Double Your Money Quickly. A Self-Directed IRA LLC can be supercharged when you buy tax lien certificates. Example: A tax lien certificate can earn up to 16% annually in your Self-Directed IRA. When you buy tax lien investments you generally receive the amount invested plus interest within 12 months. If you continue to reinvest in tax liens year after year at 16%, you can double your money in about 4.4 years. Only a Self-Directed IRA LLC can preserve this 16% return, as traditional IRAs do not invest in tax liens.

2. Your Money Grows Tax-Free. By buying tax liens in an IRA Financial Group Self-Directed IRA LLC, you can avoid all taxes until the money invested is withdrawn from the IRA, which is usually around age 59 1/2. The money can be invested once, twice or a thousand times and continue to grow tax-free, so long as it is not withdrawn for personal use. If you use a Self-Directed Roth IRA LLC, your investment will grow tax-free and you can withdraw the funds tax-free once you reach the age of 59 1/2.

3. The Flexibility to Buy Time Sensitive Investments. IRA Financial Group’s Self-Directed IRA LLC allows you to carry a checkbook that is tied to the account. This gives you incredible freedom to fund the investment at a moment’s notice. In this arrangement, you can buy tax liens with the stroke of the pen, without a custodian or other bureaucrat saying no or otherwise trying to slow down the process.

Tax liens are backed and leveraged by real estate and guaranteed by the governmental taxing authority. In most states, they are a first lien on real estate, and when foreclosed, they wipe out all junior liens, including mortgages. This allows you to potentially receive a valuable piece of real estate for pennies on the dollar!

Time to Act

Real property has been the cornerstone of wealth for thousands of years. While ill-informed speculators have fled real estate because of the housing bust, intelligent real estate investors are enjoying immense profits by expanding their geographic scope and investing for predictable income.

Why are we significantly less than everyone else and “The best in the business”?

Establish a Self-Directed IRA LLC with IRA Financial Group and have immediate “checkbook control” to make tax lien investments.

Our in-house tax and ERISA professionals will take care of setting up your Self-Directed IRA LLC. Our tax and ERISA professionals are onsite greatly reducing the setup time and cost. You will find that our fee for this service is significantly less than other companies that perform the same or similar services.

Please contact one of our IRA Experts at 800-472-0646 for more information.

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Aug 08

Leading Self-Directed IRA Provider – IRA Financial Group – Sees New DOL Fiduciary Rules Increasing Demand for Alternative Asset Investments with IRA Funds

Increased regulation on IRA financial advisors has lead to increased demand for self-directed IRA real estate and solo 401(k) real estate plans

IRA Financial Group, the leading provider of self-directed IRA retirement solutions, has experienced strong demand for its self-directed IRA real estate solutions in light of the Department of Labor (“DOL”) new fiduciary rule. The U.S. DOL is expected to finalize new rules that would change the way financial advisors are allowed to give advice to their clients. The new rules are meant to reduce the conflict of interest among broker-dealers and financial advisors who advise consumers on how to invest their savings. Under the new rules, broker-dealers would be required to act in their clients’ best interest rather than encouraging money moves that directly benefit the broker’s bottom line. “The DOL fiduciary rule has good intentions and should help IRA investors receive better investment advice, however, we have experienced some clients incur additional fees under the new fiduciary regime,” stated Adam Bergman.

Leading Self-Directed IRA Provider - IRA Financial Group - Sees New DOL Fiduciary Rules Increasing Demand for Alternative Asset Investments with IRA FundsAccording to Mr. Bergman, a partner with the IRA Financial Group, the DOL has been concerned that brokers will direct retirement investors to invest in products that may be too risky and expose them to additional fees. “We have seen this with a number of clients who saw their advisory fees increase their IRA account and then elected to move over to a self-directed IRA to have more control over their retirement asset investment.”

With IRA Financial Group’s self directed retirement plans, retirement account investors have the ability to make traditional as well as alternative asset investments, such as real estate in a tax-deferred or tax-free basis.

“The IRA Financial Group is committed to offering low-cost alternative asset self-directed IRA options to retirement account holders whose portfolios may not be big enough for traditional firms,” stated Mr. Bergman.

IRA Financial Trust Company was founded by Adam Bergman, a partner with the IRA Financial Group. The IRA Financial Group, the leading provider of self-directed real estate IRA retirement solutions. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate without custodian consent.

The IRA Financial Group was founded by a group of top law firm tax and ERISA lawyers who have worked at some of the largest law firms in the United States, such as White & Case LLP, Dewey & LeBoeuf LLP, and Thelen LLP.

IRA Financial Group is the market’s leading provider of self-directed IRA LLC and Solo 401(k) plans. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate without custodian consent.

To learn more about the IRA Financial Group please visit our website at http://www.irafinancialgroup.com or call 800-472-0646. To learn more about establishing a self-directed IRA account with the IRA Financial Trust Company please visit http://www.irafinancialtrust.com or call 800-472-1043.

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Jun 22

Hard Money Loans for Real Estate Investors Becoming Hot Investment Option for Self-Directed IRA Investors in 2017

Significant demand for hard money financing from real estate developers attracting self-directed IRA real estate investors

IRA Financial Group, the leading provider of self-directed IRA LLC solutions, announces the findings of an internal report that shows that hard money lending for real estate has become a popular investment option for self-directed IRA investors. The IRS has always permitted an IRA to lend money to non-disqualified persons. The definition of a “disqualified person” (Internal Revenue Code Section 4975(e)(2)) extends into a variety of related party scenarios, but generally includes the IRA holder, any ancestors or lineal descendants of the IRA holder, and entities in which the IRA holder holds a controlling equity or management interest “With IRA Financial Group’s checkbook control self-directed IRA LLC solution, one can use their retirement funds to make IRA hard money loans, either secured or non-secured, to non-disqualified persons and generate tax-deferred or tax-free returns in the case of a Roth IRA,” stated Jen Burris, a self-directed IRA specialist with the IRA Financial Group. “As the manager of your checkbook control IRA LLC, the IRA holder will have control over his or her IRA funds so that making a hard money loan can be made through a local bank account with no transaction costs or annual account valuation fees,” stated Ms. Burris. The primary advantage of making hard money loans with retirement funds is that all rental income generated by the investment is tax-deferred until a distribution is taken or tax-free in the case of a Roth IRA.

Hard Money Loans for Real Estate Investors Becoming Hot Investment Option for Self-Directed IRA Investors in 2017With IRA Financial Group’s self directed IRA LLC solution, traditional IRA or Roth IRA funds can be used to buy real estate throughout the United States and globally in a tax-deferred account by simply writing a check and without the need of custodian consent or steep custodian fees. “Of course one must due their diligence on the real estate note their self-directed IRA is purchasing, but, in general, purchasing real estate notes is a great way to get into the real estate market as a passive investor using IRA funds,” stated Adam Bergman, a tax partner with the IRA Financial Group.

The IRA Financial Group was founded by a group of top law firm tax and ERISA lawyers who have worked at some of the largest law firms in the United States, such as White & Case LLP, Dewey & LeBoeuf LLP, and Thelen LLP.

IRA Financial Group is the market’s leading provider of self-directed IRA LLC and Solo 401(k) plans. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate without custodian consent.

To learn more about the IRA Financial Group please visit our website at http://www.irafinancialgroup.com or call 800-472-0646. To learn more about establishing a self-directed IRA account with the IRA Financial Trust Company please visit http://www.irafinancialtrust.com or call 800-472-1043.

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Jun 19

What Determines Whether a Real Estate Transaction is Subject to UBTI?

In Mauldin v. Comr. 195 F.2d 714 (10th Cir. 1952), the court explained that there is no fixed formula or rule of thumb for determining whether property sold by a taxpayer was held by him primarily for sale to customers in the ordinary course of his trade or business. Each case must rest upon its own facts. The court identified a number of helpful factors to point the way, among which are the purposes for which the property was acquired, whether for sale or investment; and, continuity and frequency of sales as opposed to isolated transactions. However, in Adam v. Comr. 60 T.C. 996 (1973), acq., 1974-1 C.B. 1., the Tax Court analyzed the following factors in determining whether the taxpayer was engaged in the operation of a trade or business:

1. The purpose for which the asset was acquired: Examples of good facts that support the conclusion that the sale of property is excluded from unrelated business taxable income is when the property was originally acquired to further the organization’s tax-exempt purpose – in the case of a Self-Directed IRA – investment.

2. The frequency, continuity, and size of the sales: This factor is particularly significant in determining whether the sale constitutes a trade or business that is regularly carried on, within the meaning of Internal Revenue Code Section 512. It may range from a one-time sale of a parcel of land to many sales over a long period. If sales are infrequent, not continuous, and small, the organization will not likely be viewed as similar to a taxpayer in the trade or business of selling real estate. Conversely, as sales become more frequent, more continuous, and larger, they are more likely to be considered a trade or business that is regularly carried on, comparable to the commercial activity of a taxpayer in the trade or business of selling real estate.

What Determines Whether a Real Estate Transaction is Subject to UBTI?However, in PLR 9247038, the IRS issued a favorable ruling to an organization that planned to sell land in up to 15 sales spread over a five- to 10-year period. The reason for the number of sales over the time period was that the value of the land was such that it was unlikely a single purchaser would be able to acquire the entire parcel. Also, market conditions dictated this sales process for the organization to receive maximum value, and keep control of the pace and type of development that would occur after the sales. Similarly, in PLR 9017058, where the exempt organization was engaged in selling 45 of 68 lots, such sales were deemed to meet the exception from unrelated business income under Internal Revenue Code Section 512(b)(5). Although this quantity of sales is admittedly significant, external forces essentially dictated the high number of sales. The organization first tried to sell the property in one block but was unsuccessful due to the high cost of developing the property in order to comply with local ordinances. According to the IRS, had these two facts been absent, i.e., (1) the organization had attempted to sell the entire property as a whole, and (2) local ordinances required certain development prior to sale as residential property, it is possible that the high number of sales in this case would have resulted in unrelated business taxable income.

Thus, a limited number of sales is usually a “good fact” for purposes of the facts and circumstances test. However, one should not assume that a set limit applies such as, for example, 15 sales. Rather, one should remember that factors such as that frequency of sales and cost of the property to be sold and market conditions play a part in the number of sales allowed and the time frame of the sales allowed. If an organization has significant amounts of acreage, or the cost of the property precludes finding one purchaser, then it is more likely that the organization will be permitted to sell the property in more than one transaction, and still comply with the requirements of Internal Revenue Code Section 512(b)(5).

3. The activities of the seller in the improvement and disposition of the property: The smaller the extent of improvements by the organization to the property, the more likely the sale will fall under the exclusion for unrelated business income under Internal Revenue Code Section 512(b)(5). In PLR 8043052, an organization proposed to sell a parcel of undeveloped raw land . The fact that the land had remained undeveloped was significant in determining that gains from the proposed transaction would not constitute unrelated business taxable income. In PLR 8522042, the property in question consisted of both developed and undeveloped lands. The developed lands included residential land improved with single-family dwellings or condominium apartments. However, all the improvements were constructed by unrelated third parties. The absence of development activity by the organization demonstrated that it was not holding property for sale to customers in the ordinary course of trade or business.

4. The extent of improvements made to the property; The more minimal the activities of the owner in improving and disposing of property, the more likely its sale will meet the exclusion from unrelated business taxable income under Internal Revenue Code Section 512(b)(5). Of course, the greater the number of improvements allowed, the greater the likelihood of maximizing gain from the sale. So there is a balancing act that organizations must exercise when preparing land for disposition in order to maximize its return, while not acting too much like a dealer and triggering UBIT.

The IRS ruled favorably on improvements made to property in accordance with city or local ordinances requiring the organization to construct a street as well as curb, gutter, sidewalk, drainage, and water supply improvements in order to subdivide the property for sale.

Retaining limited control of the redevelopment project before the land is eventually sold also has been an acceptable activity by a tax-exempt organization when the organization is not involved in any way with advertising, marketing, or otherwise attempting to sell the lots. In PLR 200544021, an organization maintained control over the development process to ensure a compatible environment for the adjoining high school. The IRS recognizes that even though an organization is concerned with receiving a high yield from the sale, it may be equally concerned that the property be developed in keeping with the surrounding features of the property. In addition, an organization’s interest in preserving the natural beauty of a tract of land to be developed is not generally indicative of a normal sales transaction.

In PLR 8950072, a tax-exempt foundation’s largest asset was a parcel of unimproved real estate. The foundation was examining four ways of using the property: (1) continue leasing the property; (2) sell the property as is; (3) complete some preliminary development work — obtaining permits and approvals — and sell the property; or (4) completely develop the property before sale. The last alternative would provide the highest return. The IRS ruled that the first three alternatives would not subject the foundation to UBIT or adversely affect its exempt status. However, the last alternative, to assume all the responsibilities of development, would result in UBTI , but would not affect the foundation’s exempt status. Alternative 4 is very similar to the situation in Brown v. Comr. Like that case, the taxpayer intended to subdivide and develop the property for sale to the general public. Such sales would not be isolated or casual transactions. The organization planned to be extensively involved in both development and marketing activities. Thus, the IRS concluded that the property will be held primarily for sale to customers in the ordinary course of trade or business and not subject to the exclusion from unrelated business income of Internal Revenue Code Section 512(b)(5).

Aside from development activities, the lack of marketing of the property by the organization helps differentiate it from a taxpayer in the trade or business of selling real estate. For example, in PLR 8522042, an organization’s lack of promotional or development activity in connection with the proposed sale demonstrated that it was not holding property for sale to customers in the ordinary course of a trade or business. Moreover, the use of real estate brokers or other independent contractors is not determinative. Rather, the pertinent facts involve the extent of the activities of the organizations themselves in promoting and marketing the property.

5. The proximity of sale to purchase: In evaluating this factor, generally the longer the period between purchase and sale, the more likely the sale will be excluded from UBTI . For example, in PLR 9505020, the fact that a school received land by bequest and held it for a significant period of time was considered a favorable factor, and the IRS did not impose UBIT on the sale of the land when the school was facing condemnation proceedings and it did not actively advertise the sale.

6. The purpose for which the property was held during the taxable year: In evaluating this factor, generally the longer the period between purchase and sale, the more likely the sale will be excluded from UBTI . For example, in PLR 9505020, the fact that a school received land by bequest and held it for a significant period of time was considered a favorable factor, and the IRS did not impose UBIT on the sale of the land when the school was facing condemnation proceedings and it did not actively advertise the sale.
In Adam and subsequent cases, the Tax Court found that no single factor is controlling but all are relevant facts to consider in determining whether the sale of property occurred in the regular course of the taxpayer’s business. In numerous private letter rulings, the IRS cites and applies these same Adam factors. The IRS has characterized these factors as a “facts and circumstances test.” The IRS has even applied these same factors when analyzing the activities of an exempt organization that are carried out through a limited partnership between the exempt organization and the developer.

Please contact one of our Self Directed IRA Experts at 800-472-0646 for more information.

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Jun 12

Can You Use an IRA to Flip Houses?

Since the creation of IRAs back in the early 1970s, the IRS has always permitted an IRA to purchase, hold, or flip real estate.  In fact, it states it right on the IRS website. By using a Self-Directed IRA to buy real estate, you will be able to purchase raw land, domestic or foreign real estate, residential or commercial property, flip homes, and much more tax-free and without requiring custodian consent!

Flipping a Home is as Simple as Writing a Check

With a Self-Directed IRA with checkbook control, flipping homes or engaging in a real estate transaction is as simple as writing a check. As manager of your Self-Directed IRA LLC, you will have the authority to make real estate investment decisions on behalf of your IRA on your own without needing the consent of an IRA custodian. One of the true advantages of a checkbook control IRA is that when you want to Can You Use an IRA to Flip Houses?purchase a home with your self-directed IRA, you can make the purchase, pay for the improvements, and even sell or flip the property on your own without involving the IRA custodian.  In other words, with a checkbook control IRA LLC, you will have the power to flip homes or do multiple real estate transactions on your own without requiring the consent of a custodian. One additional important advantage of purchasing real estate with a Self-Directed IRA is that all income and gains are tax-deferred until a distribution is taken (Traditional IRA distributions are not required until the IRA owner turns 70 1/2). In the case of a Self-Directed Roth IRA LLC, all gains are tax-free.

Flip a Home without Requiring the Consent of a Custodian

A Self-Directed IRA with checkbook control is the most efficient and cost effective vehicle for doing house flips with retirement funds.  With a Self-Directed IRA with checkbook control, you will be able to use your IRA or 401(k) funds to purchase real estate and engage in flipping homes tax-free and without custodian consent.  A traditional IRA custodian (financial institution) will not allow you to purchase real estate using your IRA or retirement funds.  Therefore, in order to have the ability to engage in house flipping transactions using retirement funds, a Self-Directed IRA LLC with Checkbook Control is the answer.

Control the Entire House Flipping Transaction

Unlike a conventional Self-Directed IRA which requires custodian consent and requires high custodian fees, a Self-Directed IRA LLC with Checkbook Control will allow you to buy real estate by simply writing a check.  With a traditional custodian controlled self-directed IRA, you will have total control to make a real estate purchase, pay for improvements, and then sell the property without ever talking to the IRA custodian.  Since all your IRA funds will be held at a local bank in the name of the Self-Directed IRA LLC, all you would need to do to engage in a house flipping transaction is write a check straight from the IRA LLC account or simply wire the funds from the IRA LLC bank account.  No longer would you need to ask the IRA custodian for permission or have the IRA custodian sign the real estate transaction documents.  Instead, with a Checkbook Control IRA, as manager of the IRA LLC, you will be able to execute the real estate transaction by simply writing a check.

Use a Self-Directed IRA and Flip a Home Tax-Free

One major advantage of flipping homes with a Self-Directed IRA is that all gains are tax-deferred until a distribution is taken (Traditional IRA distributions are not required until the IRA owner turns 70 1/2). In the case of a Self-Directed Roth IRA LLC, all gains are tax-free. In other words, all gains attributable to the house flipping transaction will flow-back to your IRA LLC tax-free!

IRA Financial Group will take care of setting up your entire Self-Directed IRA LLC “Checkbook Control” structure. The whole process can be handled by phone, email, fax, or mail and typically takes between 7-21 days to complete, the timing largely depending on the state of formation and the custodian holding your retirement funds. Our IRA experts and tax and ERISA professionals are onsite greatly reducing the setup time and cost.

The IRA Financial Group was founded by a group of top law firm tax and ERISA lawyers who have worked at some of the largest law firms in the United States, such as White & Case LLP, Dewey & LeBoeuf LLP, and Thelen LLP.

To learn more about the advantages of using a Self-Directed IRA LLC to purchase real estate and flip homes tax-free, please call an IRA Expert at 800-472-0646 or visit www.irafinancialgroup.com.

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Jun 06

What Types of Transactions Are Subject to the UBTI Tax?

In general, most passive investments that your Self-Directed IRA LLC might invest in are exempt from unrelated business taxable income, or UBTI. Some examples of exempt type of income include: interest from loans, dividends, annuities, royalties, most rentals from real estate, and gains/losses from the sale of real estate.

When an exempt organization such as an IRA undertakes any development activities in connection with selling real estate, beyond passively placing the property for sale either directly or through a broker, the issue arises under Internal Revenue code 512(b)(5)(A) whether the real estate is “property held primarily for sale to customers on the ordinary course of the trade or business.” An organization that engages in the sale of property to customers in the ordinary course of the trade or business is characterized as acting as a “dealer.”

What Types of Transactions Are Subject to the UBTI Tax?Fundamental to considering whether an exempt organization is a “dealer” of real property is whether the property itself is held “primarily” for resale to customers in the ordinary course of a trade or business. In Malat v. Riddell, 393 U.S. 569 (1966), the U.S. Supreme Court interpreted the meaning of the phrase “held primarily for sale to customers in the ordinary course of trade or business” under Internal Revenue Code Section 1221(1). The IRS has often applied the principles derived under Internal Revenue Code Section 1221 to rulings interpreting the language of Internal Revenue Code Section 512(b)(5). The Court interpreted the word “primarily” to mean “of first importance” or “principally.” By this standard, ordinary income would not result unless a sales purpose is dominant. Both the courts and the IRS concluded that a taxpayer may make “reasonable expenditures and efforts” (such as subdividing land , construction of streets, the provision of drainage, and furnishing of access to such a necessity as water, as part of the “liquidation” of an investment asset without being treated as engaged in a trade or business.

The UBTI generally applies to the taxable income of “any unrelated trade or business…regularly carried on” by an organization subject to the tax. The regulations separately treat three aspects of the quoted words—“trade or business,” “regularly carried on,” and “unrelated.”

Trade or Business: In defining “unrelated trade or business,” the regulations start with the concept of “trade or business” as used by Internal Revenue Code Section 162, which allows deductions for expenses paid or incurred “in carrying on any trade or business.” Although Internal Revenue Code Section 162 is a natural starting point, the case law under that provision does little to clarify the issues. Because expenses incurred by individuals in profit-oriented activities not amounting to a trade or business are deductible under Internal Revenue Code Section 212 , it is rarely necessary to decide whether an activity conducted for profit is a trade or business. The few cases on the issue under Internal Revenue Code Section 162 generally limit the term “trade or business” to profit-oriented endeavors involving regular activity by the taxpayer.

Regularly Carried On: The UBIT only applies to income of an unrelated trade or business that is “regularly carried on” by an organization. Whether a trade or business is regularly carried on is determined in light of the underlying objective to reach activities competitive with taxable businesses. The requirement thus is met by activities that “manifest a frequency and continuity, and are pursued in a manner generally similar to comparable commercial activities of nonexempt organizations.” Short-term activities are exempted if comparable commercial activities of private enterprises are usually conducted on a year-round basis (e.g., a sandwich stand operated by an exempt organization at a state fair), but a seasonal activity is considered regularly carried on if its commercial counterparts also operate seasonally (e.g., a horse racing track). Intermittent activities are similarly compared with their commercial rivals and are ordinarily exempt if conducted without the promotional efforts typical of commercial endeavors. Moreover, if an enterprise is conducted primarily for beneficiaries of an organization’s exempt activities (e.g., a student bookstore), casual sales to outsiders are ordinarily not a “regular” trade or business.

Before it can be determined whether an activity is seasonal or intermittent, the relevant activity must be identified and quantified, a step that is often troublesome.

The type of income that generally could subject a Self-Directed IRA LLC to UBTI is income generated from the following sources:

  • Income from the operations of an active trade or business
  • Income earned from a convenient store
  • Income earned from a manufacturing business
  • Business income generated via a passthrough entity, such as an LLC or partnership
  • Income earned through an active business owned by an LLC in which the IRA is an investor
  • Unrelated Debt Financed Income
  • Using a nonrecourse loan to purchase a property
  • Using margin on a stock purchase
  • Income from a real estate investment that is treated as a business (inventory) instead of as an investment

Examples could include:

  • In Brown v. Comr, 143 F.2d 468 (5th Cir. 1944), the exempt taxpayer owned 500 acres of unimproved land used for grazing purposes within its tax-exempt mission. Taxpayer decided to sell the land and listed it with a real estate broker. The exempt organization instructed the broker to subdivide the land into lots and develop it for sale. The broker had the land plotted and laid into subdivisions with several lots. Streets were cleared, graded and shelled; storm sewers were put in at street intersections; gas and electric lines were constructed; and a water well was dug. Each year 20 to 30 properties were sold. The court held that the taxpayer was holding lots for sale to customers in the regular course of business. The court identified the sole question for its determination as whether the taxpayer was in the business of subdividing real estate. The fact that the taxpayer did not buy additional land did not prevent the court from finding that the sales activities resulted in an active trade or business.
  • In Farley v. Comr., 7 T.C. 198 (1946), the taxpayer sold 25 lots out of a tract of land previously used in his nursery business but now more desirable as residential property. Because the taxpayer made no active efforts to sell and did not develop the property, the court described the sale as “in the nature of the gradual and passive liquidation of an asset.” Therefore, the income derived from the sales represented capital gains income, rather than ordinary income from the regular course of business as in the Brown case.
  • Dispositions of several thousand acres of land by a school over a period of twenty-five years does not constitute sale of land held primarily for sale to customers in the ordinary course of business and thus gains are excludable under Internal Revenue Code Section 512(b)(5) (Priv. Ltr. Rul. 9619069 (Feb. 13, 1996)).
  • Developing or subdividing land and selling a large number of homes or tracts of land from that development in a given period.
  • Buying a property/home rehabbing it and then selling it immediately thereafter when this was your sole intent (note: The activity must manifest a frequency and continuity, and are pursued in a manner generally similar to comparable commercial activities of nonexempt organizations). It is unclear whether the purchase and sale of one or two homes in a given year that were held for investment purposes would trigger UBTI.

Please contact one of our Self Directed IRA Experts at 800-472-0646 for more information.

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