Most Real Estate IRA writing focuses on plain vanilla residential rental property investing or fix-and-flip strategies.
With good reason: The tax advantages of a traditional Real Estate IRA or Roth Real Estate IRA really come into play when you have ordinary rental income from rents or from capital gains (under dealer rulers) that IRA tax rules let you defer or eliminate altogether, in the case of Roth accounts.
But Real Estate IRA investing strategies aren’t limited to residential properties, by a long shot. Indeed, many of our successful clients take advantage of their IRAs as a ready source of capital to buy raw land: Beachfront property in South Carolina and Florida, lakeside future cabin sites in North Carolina and Tennessee – the possibilities are endless.
“Buy land at the edge of town. Town will be there soon enough.”
That’s a quote from one of the most successful investors we know, and it’s the engine that drives most profitable raw land investments: Land in relatively remote areas becomes more desirable and more valuable as the surrounding towns expand toward it.
But slow and gradual capital appreciation isn’t the only opportunity for profit. Owners of raw land can also realize profit in the following ways:
- Renting to campers, hunters or RV enthusiasts as a boondocking site
- Renting to farmers willing to work the land and pay rent.
- Selling timber rights
- Selling fishing rights
- Selling mineral rights (oil, coal, etc.)
- Selling advertising rights or billboard space.
All of these are ways to get current income from a piece of raw and relatively undeveloped land.
What to Keep In Mind
Obviously, you’ll want to do your own due diligence. Many people have bought plots of land, sight unseen, based on advertising or a broker solicitation. It seemed to work well for Thomas Jefferson and the Louisiana Purchase, but not every investment works out that well. If you can’t inspect the land and access routes yourself, you may want to discount your offering price appropriately.
Also, if you own the land within an IRA or other self-directed retirement account, you can’t use the land for your own personal benefit, nor for your spouse, nor either of your descendants, parents or grandparents.
You can’t buy or sell the land directly from or to any of these prohibited individuals, nor any entity they control.
You can develop the land yourself, but only using assets in the same account. So if you want to put a trailer on the land, or build a cabin on it, you need to pay for materials and construction using assets within the same IRA, or qualified money that you can rollover into that same IRA. You can borrow money to complete the development, but only on a non-recourse basis. You can’t sign a personal guarantee on the loan, and you can’t pledge anything outside the IRA as collateral on the loan.
Furthermore, you cannot hire any of these prohibited counterparties, nor any entities they control, to handle the development or property management for you. To do so risks having the IRS disqualify the IRA and force you to take an immediate distribution, costing you unwanted taxes and penalties.
Obviously, raw land is not very liquid. It can take some time to sell, and you have substantial marketing or commission expenses when you do decide to sell the land. Remember also that you have required minimum distributions to make starting with April 1 of the year after the year in which you turn 70½. Ensure you have the liquidity to make those distributions if you don’t want to sell the land by then.
If you’re a real estate enthusiast and you have investable assets within your IRA, SEP, SIMPLE or 401(k) that you’d like to invest in real estate, we’d like to work with you. American IRA, LLC, headquartered in Asheville and Charlotte, North Carolina, works with successful real estate investors all over the country. We’re a leading third-party administrator of self-directed IRAs. For more information, visit us online at www.americanira.com, or call us today at 866-7500-IRA(472).