Many people who use self-directed IRAs know real estate can be held as an asset in these accounts. However, when thinking of real estate, what comes to mind most often are rental properties, rehab-and-flip projects, and other buildings or homes that offer potentially healthy returns on investments. Raw or unimproved land is not the first thing that pops into one’s head when considering real estate options. I mean, what the heck are you going to do with a field or a forest or an otherwise untouched patch of land?
Well, let us tell you.
Raw land offers potentially great opportunities for those who understand what is involved in the process of using it as an investment. However, these ventures sometimes require time—and lots of it—to produce any return on the investment, depending on the investor’s intent and goal.
While often there are low costs and virtually no maintenance involved in holding raw land assets, sometimes expenses can be quite extensive. Again, this depends on the purpose of acquiring land as an asset. It’s important to consider these factors, as any and all expenses must be paid directly out of your self-directed IRA funds.
Popular investments in raw land include:
- Residential and commercial development property – prime pieces of land in areas where growth is expected can be parceled off and sold or even leased to building contractors and investors; if you have enough capital in your IRA you can develop the land in this way yourself
- Oil and mineral producing land – mineral rights can be leased to mining companies or other investors; the right piece of land can also be bought at a fair cost and sold for more to achieve a gain
- Timberland – both hard and soft woods can be planted, harvested, and sold to make a profit; tracts can also be leased to others, such as timber companies for the same purpose
Other land options are those that involve raising crops, cattle and other farm animals, orchards, and even vineyards. These examples may include improvements that were previously made to the land in order to provide sustainability for its intended use. Or, an investor could purchase land using a self-directed account with the intent to make improvements for these purposes. Businesses can be held as assets in self-directed IRAs and many investors use them in this manner. So, your self-directed account can own a winery and build retirement wealth from the profit that business makes.
While acquiring land as an investment within your self-directed IRA may sound easy, it’s important to understand the process can also be complex. Different states have different requirements pertaining to land use. If you are going to develop the land, you have to be aware of permitting requirements and other regulations that apply. Make sure your IRA has adequate funding to not only purchase the asset but also to fund any maintenance or development projects you intend to take on.
Additionally, you must fully understand and follow IRS guidelines and rules pertaining to these investments in a self-directed IRA.
- All income and expenses relevant to the investment must flow directly into and out of IRA funds
- Avoid prohibited transactions and dealings with disqualified persons.
- Land purchased with the intent of running a business (raising crops, cattle, etc.) within an IRA is subject to unrelated business income tax (UBIT)
- If your IRA exercised its ability to take out a non-recourse loan to help purchase the asset, unrelated debt financed income (UDFI) tax may apply
As always, performing extensive due diligence is required when considering any investment. You must also consult experts (attorneys, CPAs, realtors, etc.) to ensure transactions within your self-directed IRA are fully compliant within the restrictions and guidelines set forth by the IRS. Non-compliance issues can cause heavy penalties, taxation, and even disqualification of your tax-sheltered account.
If you have any questions regarding this article or would like to learn more about self-direction, please contact us.