Question: I have set up a self directed IRA and I want to buy a buildable lot and then have a duplex built on the lot. Are there any publications that deal specifically with self directed IRAs and this scenario? My main concern is whether or not my IRA can build a spec home and if I can do any of the work on the property.
Answer: If you go to www.IRS.gov you can view Publication 590, this publication defines everything the IRS wants you to know about IRAs. We think of a self directed IRA as 'non traditional' but for IRS purposes an IRA is an IRA. Any IRA that is not a ROTH IRA is considered 'traditional' and would fall under the guidelines listed there. As you will see the IRS rules on allowable work are not very specific concerning the Self-Directed IRA account holder and work performed relating to the real estate purchased. On page 45 of the 2008 publication, you will see what you CAN'T do. The IRS forbids you from receiving any unreasonable compensation for management. Doesn't say you can't be paid - but it does say it must be reasonable.
In general, the IRS permits IRAs to invest in real estate and buying a vacant lot and building on it is real estate. So the question is can you handle the general contracting? I believe the answer would be ‘yes'. Can you be paid to be the subcontractor - I believe that answer is 'it doesn't specifically say you can't be.'
This type of work may be considered similar to how management ‘jobs' performed by the IRA owner are handled. For instance, account holders can arrange for work to be done on the property, but payment for labor and materials must be issued by check from the custodian directly to contractors and suppliers.
Another permissible scenario is account holders can perform maintenance work that does not increase the property's value. This may include examples such as maintaining the landscape, a minor plumbing repair, doing shingle repair on a leaky roof or painting a few rooms between tenants.
Some investors arrange to have an unrelated entity such as a corporation or LLC do the work for the IRA. Then, this company is hired and paid by the IRA - then that company can take those funds and hire or subcontract with the IRA account holder to do the work. Again, there isn't a clear answer as to whether or not the IRS absolutely disallows that but as long as the compensation was not ‘unreasonable' - it is my opinion that it is permissable.
Finally, keep in mind that just because the IRS allows it - doesn't mean your IRA custondian will do it. Some IRA custodians don't want to deal with certain real estate transactions. Check with your custodian before you make the purchase.
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