Raw land investments can serve many lucrative purposes, but have you considered retirement income among them? From rental properties to fix-and-flips, retirement investors have utilized their business expertise to build a comfortable future. Some investors may not realize that property is a permissible retirement asset, but tax-advantaged savings vehicles like IRAs and 401(k)s can own a house, commercial building, or vacant land the same way they can own stocks. These accounts feature tax benefits that can help offset any tax-related concerns that may otherwise deter a potential real estate investor. Pre-developed land has flown under the radar as a viable option for real estate IRAs, but that has changed rapidly over the last several years.
The beauty of self-directed retirement lies in the hands-on nature of certain business activities. In the context of a vacant land deal, the roles of the broker and of the investor are virtually the same as a transaction with non-retirement funds. Investors must maintain a degree of distance from their IRA holdings, but they’re still able to establish terms and prepare documentation. IRA holders may even pursue non-recourse financing on behalf of their plans to broaden their purchasing options or compensate for a capital deficiency.
Although an IRA—as its own investment entity independent of the IRA holder—is able to invest in raw land, the plan holder must follow certain rules to avoid prohibited transactions and possible tax consequences. If your piece of IRA-owned property needs some measure of work before leasing or selling it, the use of personal funds, assets, or efforts would be limited or restricted. For instance, your IRA may own a plot that you’d like to lease as farmland, but there’s a dilapidated barn that has to be removed before you can proceed. Because your retirement plan owns the land, you may not pay for the barn’s demolition and removal with your own money, nor may you fire up a bulldozer to knock it down yourself. Any and all expenses inherent to the development, maintenance, or repair of the property must be covered with IRA funds.
In maintaining suitable distance from their retirement assets, investors must also be careful not to conduct IRA business with disqualified persons. Such individuals include anyone in the plan holder’s direct familial lineage or their spouses (daughter, father, son-in-law, etc.) and any individuals with fiduciary responsibilities to the IRA. Non-lineal family members like siblings, existing business partners, or trusted friends are non-disqualified persons and may therefore interact with the IRA more directly. They can provide repair services, serve as property managers, or even take up residence as your tenants. Concerns regarding disqualified persons revolve around the separation of one’s personal funds from his or her retirement dollars. IRAs and other such accounts provide significant benefits, so it’s important that tax-advantaged income never reaches the personal bank accounts of plan holders.
That being said, disqualified persons are not 100% prohibited from getting involved with IRA-owned assets. Keeping the money separate may prove especially challenging under these circumstances, but partnering with disqualified persons is certainly possible. Let’s review a few example scenarios that may arise when a self-directed retirement plan and a disqualified person work together on a vacant land investment:
- Your IRA and your father own a piece of raw land together, each with a 50% equity share.
- If you both decide to sell the property, you would each receive 50% of the sale proceeds in accordance with your ownership percentages. Any other income from the asset would be distributed evenly in the same fashion.
- Let’s say you elect to sell your IRA’s portion but your father wants to keep his. This is perfectly allowable as long as the IRA portion isn’t sold to a disqualified person (including you).
- If you decide to build a residential or commercial property, all expenses would have to be covered in equal amounts. Both parties could pay no more or less than 50% of any applicable costs.
- Just as you wouldn’t be able to retain your IRA’s money on a personal basis, your father could not accept income credited to your IRA.
Whether you go in alone or pursue an investment with a series of partners, a raw land investment with a self-directed IRA is worth considering. The same approaches that you’ve already mastered—hold and flip, land leasing, construction, etc.—can be applied to assume genuine control over your retirement. Your IRA has the opportunity to yield the same profits that you’ve come to enjoy with your personal pursuits, all while garnering the tax-deferred or tax-free benefits that are only available through retirement investing. A growing marketplace of offerings, expanding technology, and a new breed of IRA providers that specialize in alternative assets like raw land are making it easier than ever for real estate investors to make a virtually seamless transition into this arena.
About the Author: Bill Humphrey is co-founder and CEO of New Direction IRA, a provider of self-directed retirement plans. With over 20 years of experience as a certified public accountant, Mr. Humphrey has broadened his expertise to include real estate and other alternative retirement holdings. Since 2003, New Direction IRA has provided administrative services for thousands of alternative investments in IRAs, 401(k)s, and health savings accounts.