EP 41 – Buying and Selling Land in Your IRA
In this Podcast, we covered buying raw land in your IRA or Solo 401(k) for investment holding or to be improved and sold for profit. Mat and Mark explain the prohibitive transaction issues, structuring problems, and when taxes may apply when doing certain development or improvement activities.
Mark Kohler: Welcome everybody to this week’s episode of directed IRA podcast, the only podcast that has two reasonably, you know, face for radio guys. You know, we’re trying to this is all we have to work with. I mean, we get regular facials. We really try to make sure we look good for you on YouTube and sound very presentable on a podcast or lawyers. I mean, I don’t know, how can I make people realize how special this is?
Mat Sorensen: Well, we self-direct our own IRAs too, you know, so we, you know, we eat the food we’re serving out of the kitchen, too. So what things come big, do you know? Yeah. You know,
Mark Kohler: On that note, it’s kind of funny you say that because where was I at? It was like two or three days ago, I was somewhere and they go. Oh, I was doing a little thing on Monday night for a webinar for a real estate group and they were saying, Well, you can buy cows with your IRA or HSA or we heard that you were doing that. You can do this and I go, Hey, hey, before any client of ours was buying bitcoin and their IRA Mat Sorensen did it before any client of ours bought a rental property in an HSA. I did it before anybody bought. You know this that nook before any client of ours was mining and their Roth, I was doing it. And so I think, you know, we’re going to go out there and take the shots. We’re going to be the guinea pigs, you know? Yeah.
Mat Sorensen: And and we learn and that’s why we come back and why we can be effective at advising. Nor are we just like looking at the tax laws and giving you good tax and legal advice, but also the practical things you need to know to execute on some of this stuff. So we just love Self-direct and being able to take control of your retirement, invest in the assets that you know and love, and that’s what this show is dedicated to. And today we’re talking about buying and selling raw land. Of course, we’ve got stuff on real estate in general or buying a rental property or flipping a house with your IRA. But what about the good old raw land that you can buy? Maybe do some stuff to it, maybe not. And then sell for a profit in your IRA or 401(k).
Mark Kohler: Ooh, and I like how you just threw in that little red herring, the red dress and the matrix. He’s like, Maybe do something to the land or not. Yeah. Geez, what do you want to throw out? No, no white bread for you. No sugar for you.
Mat Sorensen: Yeah. And no dairy.
Mark Kohler: No dairy. Go vegan. You know,
Mat Sorensen: Just an exercise. Try to eat less meat. And as you’re walking out the door, oh no more dairy. Oh dang, you
Mark Kohler: Got to get one or something. Giving kudos to Brian Regan. We should have him on the show. You know, that’s one of his routines. We love him. But here here’s the thing when you’re going to buy and sell raw land, we know the legal and the tax ramifications of that. But on the techniques of making the most profit on raw land, that’s not us. I mean, we’ll just tell you what we think you should do and what our other clients that are making millions are doing. But this show is not about how to buy and sell raw land, it’s how to do it in your IRA. We had lamb geeks on our Main Street business podcast, and that’s all those guys teach over there. Great stuff. And so there’s some great groups that are teaching raw land trading, and it’s kind of funny. It’s like this dark web of land buyers and sellers in the country. They just like to buy land. You know, you go to New Mexico and buy 10 acres for like 500 bucks, you know, and I own a piece of land, you know? Yeah, it’s it’s different.
Mat Sorensen: So yeah, no, I mean, you know, land has been pretty valuable and appreciating, particularly here in Arizona where I’m at, you know, I mean, there’s homebuilders now, you know, are going gangbusters, just building as many houses as they can. They can get materials and labor for their frickin building. But what do they need land I don’t want?
Mark Kohler: What’s that? I don’t get it. I was in Phoenix over the weekend and I’m like, This is so barren and dry and hot and ugly. And I mean, not the desert landscape isn’t a little beautiful, but up here in Idaho, I’ve got the Grand Tetons pine trees lakes. It’s just these nut jobs down in Phoenix Go. Yeah, but it comes with 20 degree weather. You know, get over it.
Mat Sorensen: Well, you know, I land’s been going up in Idaho to, you know, it’s been going up everywhere. We’ve got, you know, that’s one of the big stories is this, you know, lack of new homes being built. That’s why we’ve had so much appreciation. There’s a lack of supply. And builders were just being gun shy since the last real estate collapse in like 07 08. And so everybody got a little gun shy and frankly didn’t get ready to be building the capacity of our population growth. So that’s created an interesting investment opportunity for those who want to buy land, do it strategically, whether you’re just buying sell the raw land or you improve it. So we want to talk about those. It’s been popular. I’ve had lots of clients do it. I know Mark’s work with lots of clients. In fact, my very one of my very first clients ever did an IRA deal with was a land deal. He actually did an option on it, even by the land. He just did an option on the land and then sold the option a few years later for a huge profit. So there’s different ways you could do the land, maybe optioning land or just obviously buying it outright and owning the land for a period of time for hopefully some appreciation and improvement.
Mark Kohler: So and for those that are watching it on YouTube, let’s do a little housekeeping. You can catch this show on YouTube as well as your favorite podcast channel. And some people, sometimes we use a whiteboard. We’ll always let you know if that’s the case today. I don’t expect a whiteboard involved, but sometimes it’s fun. Watching on YouTube, it’s a little easier to get. The training, the expressions, the fun, watching our facial expressions as we jab each other. But if you are watching on YouTube or your podcast channel, please give us a five star. Give us a little share. Give us a little thumbs up. Whatever we it really helps other people find this. If you’re here, hopefully you found this is a little hidden gem in your wealth building strategy. Please share it. And if you’re watching, you’re like all our callers texting. While I’m writing down a topic for next week’s show because sometimes in our show we get these ideas of we need to do a show on that. So, yeah, should I reveal?
Mat Sorensen: I reveal. I mean, I hope it’s good. If it’s not, I’m just going to say it. So don’t don’t. Make sure you’re confident. Are you confident?
Mark Kohler: I’m confident. Ok. Well, well, well, I’m confident this could be a good one, even if it’s the answer. No. Even if the answer is no, here’s the show title. Ok, can you buy and sell NFTs in your IRA? Mm-hmm. What do you think there might be some options? Yeah.
Mat Sorensen: Yeah, we’re going to talk about that. There’s different types of NFTs and some rules for theories on what ones you could buy or not. So, yeah, let’s definitely hit that. All right. So stay tuned. If you’re like in NFTs, maybe you’ve been following that. You got up to speed on it. But let’s talk about let’s kind of get an overview. If you don’t mind if I could just kind of do a little quick overview on buying land in your IRA. So let me talk about a couple of things. Ok. First, and if you’re like catching this and you’re like, I don’t even I mean, my IRA is at fidelity Mat. They won’t let me do this. Ok. All right.
Mark Kohler: Start over. Ok, well, you wanted to go back to the beginning of time. All right.
Mat Sorensen: Well, we have saying if you’re just like, I just barely caught this. I mean, I’m just saying we have the whole like first five podcast episodes are on just the basics of getting to a self-direct diary. In short, if your IRA is it like Fidelity or Merrill Lynch, they won’t let you buy land with your IRA. That’s not because your IRA can’t own land. It’s because your IRA at Fidelity or Merrill Lynch won’t let you do it. That’s their restriction. So you’ve got to move your account or the piece of funds you want to do for this. Move it to a self-directed IRA custodian like our our company directed IRA. Ok, now you got an IRA directed IRA account. It could be Roth traditional set. It could be a solo K, whatever. All right. All right. I’ve got a piece of land I want to buy. First rule is the IRA needs to own it or maybe use an IRA LLC
Mark Kohler: And you’re going really fast here. This is insane. I’m just
Mat Sorensen: Given this. I say I’m given the overview
Mark Kohler: That, Oh, OK, all right. I was like, Man, you know, OK,
Mat Sorensen: Ok, IRA,
Mark Kohler: This is the trailer. I always hate trailers because it gives away the show. It’s like always the best scenes. I’m like, Why watch the show? I already know who killed him. Ok, go ahead and give them the trailer.
Mat Sorensen: All right. I like to give them the roadmap of where we’re going, you know, turn off and then, you know, that’s what we learned. One pack harmonized. You say, tell them what you’re going to tell them and then tell them, OK, I’m telling them what we’re going to tell them first.
Mark Kohler: Then OK. All right. So back to this, you’re going to you
Mat Sorensen: Now know you can is going to own it. Ok, IRA, he’s going to put the money on down for it. The IRA is going to get any rental income if you have it. But but now this is the raw land, so you can’t use it, you’re holding it for investment. Maybe you approve it. We’ll talk about that. But the goal here, of course, is for it to appreciate in value and you to sell it and get income back. Now again, you could rent it. I’ve had some clients that have rented it for cattle or other people have use of the property. We had one cell towers. Yeah, cell towers. We had one client renting it to a hunting and fishing club or something like a hunting club. Billboards, they would put people on billboard. There you go. Yeah, yeah. So you can own the land itself, some rental income, or it could just be, you know, just holding purely for hope to sell in the future. So yeah, that’s the basics of it. The game goes back to the retirement account. No tax. That’s the awesome thing about using a retirement account to do this. All right.
Mark Kohler: Ok, that was a big picture, man. Tell him the spoiler alert.
Mat Sorensen: What a gone faster if I wasn’t interrupted.
Mark Kohler: Yeah, jeez. Oh, by the way, at the end of the show, we got to do a Britney Spears update. Oh yeah. Now that’s kind of a mainstream business podcast for those that didn’t know we have, of course you have our sister podcast. It’s more about business tax saving, asset protection and wealth building, where we’ve dedicated this podcast just to self-direct. But you know, we got to cover the important issues and it was in the news who cares about the Senate bill or the House bill? I mean, Britney Spears, I mean, that’s right. That’s cute.
Mat Sorensen: Let’s keep it straight.
Mark Kohler: All right. So when you said you went back to the beginning, I was like, You’re going to say now there was Adam and Eve, and you know, Satan came along and said, Eve, you can self-direct. And she’s like, really? And so she went for it. And now all hell broke loose. You know, now they know. So just so things happen back at the beginning, you know?
Mat Sorensen: Yeah. I mean, Mark has, definitely color commentary today,
Mark Kohler: But I’m going to throw down. I’m going to throw down. Ok. All right. So step one, OK? You bring it on, bud.
Mat Sorensen: Ok, let’s say Britney Spears has an IRA. All right. And she wants to buy some land.
Mark Kohler: Ok, Britney. She gets beat up so much. I can’t use her as an example. I respect her too much, you know, as an entertainer, as a as a fellow entertainer.
Mat Sorensen: Nobody wants to self-direct. She’s free Britney and her free Britney’s IRA too
Mark Kohler: Free Britney’s IRA. Yeah, we’ve got to get her on the show. Ok. All right. So here’s the deal you may have an IRA with, say, 50 grand. The nice thing about raw land trading or buying and selling, I will say this the price point is a lot less than some instances. We’ve had clients start out with raw land that is completely undeveloped in some unique areas, and just a road being added 50 miles away can double the value of their raw land quite quickly. So that’s what raw land trainer you know programs will teach you is that you’re going to buy raw land and unique areas. You could buy raw land that’s five thousand five hundred or fifty grand or five million. So you’ve got all these variables. Raw land can be pretty exciting at a lower price point. So let’s say and step one, I’ll do step one is all right, man. Ok, so step one, yeah, you’re in this circumstance where you have some skills, you see some raw land opportunities, you’re learning about it in your own trading. Maybe you’re doing this personally and you’re like, What the hell? I’m going to let my IRA do this.
Mark Kohler: So you’ve got 50 grand, let’s say, sitting over in an old 401 K from a prior job or an IRA or a Roth IRA, which we prefer the gem of all. But let’s say you’ve got 15 grand sitting in an IRA at a broker dealer. They’re not going to let you do this. So step one is open an IRA, preferably a directed IRA, because we love them. We’re affiliated with them. Both officers in the company love it. But check out directed IRA to open up the type of IRA you want. Maybe it’s a Roth. Maybe it’s traditional or whatever. Open the IRA and transfer the money. It’s tax free. There’s no penalty. You’re just moving the money. I had the other day someone said, I’ve got to pull money out of my fidelity to buy raw land. No, no, no, no. You’re not pulling the money out of your fidelity. Step one Let’s get the money ready to go by transferring it to an IRA custodian trust company like ours that allows you to buy raw land. Step one. Fair enough. Yep, OK, you do. Step two
Mat Sorensen: All right. Step two is the IRA is going to be the buyer when you go to the contract on this thing. Mark Kohler is not buying this. Britney Spears is not the buyer on the contract. All right. It’s directed trust company FBO Britney Spears IRA. That’s who’s going to own the property now. You could use an LLC. This is more common for flips and rentals, but raw land. There’s not a lot going on with it. It’s not like you get a lot of bills. You got a property tax bill once a year. You know, you may not need an LLC for raw land, but you could, depending on other investments you’re doing so. But just the principle is IRA is going to buy. IRA is going to be on the contract. IRA is going to be on the deed. The money from the IRA is going to be on the down payment. Earnest money. It’s going to be the money going into close.
Mark Kohler: Ok, now. As a good co-host, we’ll do I’m going to tell my partner. He blew it. That was not step two. All right. I’m just going to say, yeah, step two.
Mat Sorensen: That was my step two.
Mark Kohler: Yeah, well, I’m going to tell you the real step two damn step two is you’ve got to decide how you want to buy this raw land because you may do it. Like Mat said through your IRA directly, you may do it through an LLC. So I think step two is let’s sit back. This is where a consultation with one of our lawyers at the law firm can be very helpful. We’re maybe listening to again our first five to 10 podcasts in this session. I mean, in this series, because you’ve got to realize you have options. And so Mat know I respectfully say, I think step two is you’ve got to have a plan if you just go out and buy this land in your IRA. You may have not realized there were some other options. If I may say OK now, so maybe step two is could we define the two paths? A fork in the road?
Mat Sorensen: Ok. Yeah, we could define the two paths. Ok, now I kind of said that, but you could say it Mark can say it in his way. Anybody new to the show marks a little opinionated.
Mark Kohler: What? I would throw it back at you. All right. No, but I think.
Mat Sorensen: Fair point. Fair point. Yeah. And I say this with all due respect, with all due respect. No, I’m just kidding. But fair point. True. You may just buy it with the IRA directly, which you have a little bit a different path. Or you may use the LLC. Let me just say this, though, because I want to get too far into the LLC. Mm hmm. We have a separate podcast episode that so you feel like, yes, I want to do the LLC. I want check writing, you know, do I need asset protection for the raw land? Probably not. You know, I mean, it’s not like a rental or a flip where there’s some liability concerns. As much depends on the other stuff you’re doing on whether you’re going to pick the LLC. The whole separate podcast up so directly dedicated to that little outline how you do it.
Mark Kohler: Ok, now the reason why and I agree, completely agree. Great comment, but I want to tell you why an LLC might be the right route when you’re doing right raw land and why it may not be, and you just want the LLC, the IRA directly to own it. For example, let me give two examples. Yeah. Example one is you see a piece of raw land. Maybe it’s in your town, in your neighborhood, near grandma or whatever, and you kind of see it as a strategic acquisition. You’re like, I’m not in the business of flipping raw land. I’m not going to go out and do 10 more of these deals. I just want that raw land, and I think they’re going to put it in an overpass. I’m just going to sit on it for three to five years, and I just it’s kind of a you’re not doing this actively. Mat, I would say that would probably be a good fit to just let your IRA buy it go on title when you have to pay property tax every year. Transfer money to the IRA or make an additional contribution so it can pay the property taxes if necessary. But just it’s just kind of a simple deal.
Mark Kohler: Would you agree? Yeah. Yeah. Ok, now. My daughter, Sydney, actually did some training at Land Geeks and was bought some raw land, she still owns a few parcels. And if you go down the path of saying I want to buy and sell more raw land, you see it as a strategic opportunity. Maybe you’ve got a little experience in that. Like Mat said, you might see an opportunity for a renting it to a farmer cell tower, a billboard who knows what. So if you’re going to go down that path, what happens is you’re going to see a lot of transaction. A lot of transactions become necessary. You might buy and sell quickly. You might need to pay for some property tax or a little improvement, or maybe some surveying. And all of a sudden, those transactions create a huge burden on having to call your custodian or trustee every frickin week and you’re like, you’re going to get fed up real quick. So I think the LLC becomes a good fit for when you’re going to be doing a lot of transactions in the land arena where you thought, what do you think?
Mat Sorensen: Yep, yep, I totally agree. Yep. Or maybe you’re going to do some improvements, I think, you know, that’s that’s one where I’ve had lots of clients like, let’s definitely use an LLC like, you know, we’re going to get the zoning changed. We’re going to put in some curb and gutter or whatever in preparation from for somebody to build or to come in and just have it be turnkey for them to just start building. So even if it’s just paper development stuff, you know, like, you know, the LLC could be could be helpful. So yeah,
Mark Kohler: I’m good about that. Now that to me, in retrospect, everybody is step two. You want to get your money over there and then step two have a plan. Whenever you kind of get excited and you kind of move quickly into a transaction, you sometimes have buyer’s remorse going, what freak? I could have done it differently, so I’d say Step two Map out your plan for this land buying strategy. Is it a one off deal? Is it going to be more frequent than that? And then you go to step three and start to consummate the transaction.
Mat Sorensen: Ok, that’s a that’s an interesting way of saying consummate the transaction.
Mark Kohler: Well, was that a little too sex ed class?
Mat Sorensen: And that was I was like, we just we just I just consummated the transaction on this real estate deal. Honey, you did what you consummated to do. I bought some land with my IRA. Mark Kohler calls it consummated the transaction. Oh, OK.
Mark Kohler: Complete the transaction. Ok, that’s it. I’m going to look up consummating. Well, I better not have it or not.
Mat Sorensen: Yeah. Careful, careful what you type in there. Ok, OK. Well, here’s an important tip that’s unique to land with an IRA. You know, when you’re let’s say you’re buying a rental with your IRA, one consideration is always going to be should I get a loan? And it’s like, Well, if you get a loan, you have to get a non-recourse loan because you can’t guarantee the debt. Same thing with land here. But one thing that’s unique on the non-recourse loans is there’s there’s a lot of banks out there. We have a ton listed on our site that like to lend to IRAs, just buying single family rentals or your IRA LLC buying a single family rental. One of their loan conditions, though, is the property must have income. It’s got to have a rental income. So getting a non-recourse loan to buy raw land is really difficult because there’s no income. The lenders like what we need income on this to make sure that the IRA can pay the loan payments. So generally, you’re not going get a non-recourse loan or a loan to purchase raw land. A lot of clients are buying with cash. Now you could negotiate terms with the seller, for example, to just have some seller carry. That’s non-recourse where you pay some amount down now, and the and the seller carries the balance. So just keep that in mind, a little unique thing on land as opposed to maybe a rental. The non-recourse loan is going to be a little trickier to pull off and probably impossible if you’re trying to use a bank.
Mark Kohler: And I would say that too. I’ve got a lot of clients that that do land trading or land investing and rarely is going to be lending involved. Lenders don’t like to just sit on land because they’re worried. If there’s not cash flow, who’s going to pay the bill? So I agree with that. And maybe this is a good point to say. Are there any more steps? Maybe, maybe not, because I think when one when you’re ready to go. Yeah, when you’re ready to complete the transaction in step three, it’s really you’re either in the LLC world or you’re in the direct hold world in the name of the IRA. And so let’s just talk about issues to consider. So no one Mat just said lending is probably not a good fit. Even though you can do it, it may not be a good fit. Number two, I’m going to bring up a unique consideration, and that’s privacy. I have a lot of clients that when they’re buying and selling raw land, they want to. There’s a lot of techniques that I learned through land geeks of keeping privacy. Where’s the mailing address may be as your personal name on this or not, because it could give you leverage and other sale if they see you as a holder of other properties. And so if your IRA is going to go on title on this property, then your name is going to probably be out there, right? It’s going to be IRA X Y Z. What would the title look like back give them?
Mat Sorensen: Yeah, it could be. So if you’re buying with your IRA, Directed trust company, FBO, Britney Spears, IRA. Now we do have the option, you have to special request this because it takes a little more work on our end. So you could have your IRA identified just by the account number. So it could just be directed trust company FBO account number one two three four five six. And so your name’s not on it. We are going to identify it based on account number investing. And so maybe someone like Britney Spears who may not want people to know that she owns land somewhere or just, you know, met every ordinary American made like that? You could, you could. You could request that as a special request here. There’s a couple other trust companies that do that. Most don’t, though, but we thought it’s a nice little thing to add, even though it does take a little more work. It’s a nice get some privacy.
Mark Kohler: It’s a nice feature.
Mat Sorensen: That’s a real, nice feature. Yeah, this one. Keep your food cold.
Mark Kohler: I know I working on a Brian Regan kick. He hasn’t.
Mat Sorensen: I haven’t listened to him forever, but his lines just seem to come up. They just pop up.
Mark Kohler: And yeah, if you if you want to have some fun, folks, when you’re done with this podcast and only after your completed listening to this, after you, after you’ve consummated this, then you can go over to YouTube and type Brian Regan refrigerator because he’s got this little thing where he goes. I went to buy a refrigerator and there like this one makes ice. This one keeps a cold, which is a nice feature. You know, it’s like, what do you have, you know? Anyway, so I think privacy is a consideration, and the nice thing about an LLC is, you can name it whatever. You can have a mail forwarding address strategy. We’ve set up LLCs where our office is the address for your LLC,
Mat Sorensen: Extra fee for that. But yeah, at the law firm.
Mark Kohler: But yeah, yeah, there’s a few. Yeah, we just don’t do that for free. I mean, I’ll make Matt’s home address the address for your LLC any time you want. Yeah, yeah, yeah, now. But but some people want the privacy of maybe another entity being the manager of the LLC. They want to bury this thing in privacy. So the LLC would allow you probably some more flexibility for that. Yeah. Ok, third issue. I’m going to go down the issue of frequency. See if you’re doing more than two or three, I’m going to say more than three or four land swaps, let’s call them land deals. You’re selling a piece of land and reselling it before you even 12 months is up, which in the end, if you do that in your personal name, you. If you did less than three or four, you’re going to have short term capital gain if you hold it 12 months or more. You have long term capital gain. Well, you’re going to say, Well, Mark, if I’m doing these land deals in my IRA, I’m never going to pay tax because it’s my IRA. Well, buckle up. You may want to chapter on this in Matt’s book regarding UBIT. Do you want to explain that in English for people what that means? UBIT. Yeah.
Mat Sorensen: Yeah. Basically, it’s unrelated business income tax. And so if you’re flipping enough property in your IRA or you’re buying it and and flip like, Mark said, less than 12 months, you’re owning it for only for less than 12 months before you sell. If you’re doing a lot of that, the IRS is going to look at your IRA like it’s in the business of and of real estate. And if it’s in the business of real estate, IRAs have to pay unrelated business income tax. If you’re holding them for 12 months, though, or you’re only flipping one or two a year where you only own a less than 12 months and it’s only one or two deals a year. Your IRA is just investing and investing. Income is what IRAs are designed to receive, and you don’t pay tax on. So you want to make sure that you’re only doing a certain amount of transaction volume one or two short term deals a year in your IRA. Totally fine, holding less than 12 months. No, UBIT. If you’re like, Man, I’m doing one a month where I buy it and I hold it for a few months and flip it, and I’m like, I’m like, Oh, that’s enough, you’re going to have this UBIT tax problem. We’ve got a whole separate podcast getting into that strategies to minimize it and avoid it. There are some strategies to minimize and avoid that. So. So check that out, but just flag that as an issue. If you’re like, man, I was hoping to just flip a property every month or some land every month. Yeah.
Mark Kohler: And and and for those of you that are in the land flipping business and you’ve wanted to catch up, catch this podcast. I’ve got to exemplify or explain Mat last point with a little story. This was probably gosh. Fifteen years ago, I met with a client that was an ex farmer slash rancher, and he was down in southern Utah, and he had given up ranching and farming because of course, there’s no money in it. And he’s done. It’s a lifestyle choice. He said, You know what I’m going to do, I’m going to buy and sell land. At in the farming areas where I live, because I know land and I know farms, and he had sold his farm and split it up, and he’d kind of realized that buying and selling land was more profitable than buying and selling steers. So he said that was his deal, and he came to my office and brought his tax return and said, I need help trying to create privacy, and I want to talk about maybe some write offs and things for this land business I have. Now what was interesting was he brought his tax return and I pop it open. And what was I looking for? I was looking for a business. You didn’t have an entity, so I thought, Well, this will all be on a Schedule C, as in Charlie.
Mark Kohler: But knew he had a Schedule D, as in David. And what his accountant had done is put twenty five land deals that he last did last year and called them all short term capital gain and threw it on a Schedule D. Oh. And I was like, Whoa, whoa, whoa, whoa. Now this is where land geeks and I might debate this type of stuff a little bit, but. Most accountants and I think and what we feel strongly about and as the letter of the law is that I told him. You’re not buying and selling. Investments you’re buying and selling inventory because you’re in the business of this due to the fact you’re doing five, 10, 15, 20 in his situation deals and he’s like, this was terrible news for him. He was like, Oh my gosh, I want, I want short term capital gain. I said, No, this should be on a Schedule C, which means he’s subject to self employment tax. Now, on the flip side, what did he come in to ask me? Mark, I want write offs on my land business. Well, if it’s if it’s buying and selling investments, there is no write off unless it’s directly associated with the improvement of the property or or the basis for which you bought it.
Mark Kohler: And he’s so he was like really wanting write offs, which means he needed a business. But then he didn’t want to pay self-employment tax, so he wanted to call it short term capital gain. And so he wanted his cake and eat it, too. He was stuck in the middle and I said, But you don’t have a choice. This is an operational business. Let’s do an s corporation. You’re going to pay a little bit of salary, which is cool. We can drop it in a 401k and and get you the trading land and your 401K as well. And and let’s go treat this like a business. And so full circle here, when Mat talks about UBIT in an IRA, it’s the same concept. If your IRA morphs into really the business of buying and selling raw land, then that’s when this extra tax comes into play and we got a strategy for it, folks. We’ve been thinking about this. We got we have a blocker corporation and we got strategies that’ll help you do exactly what you want to do and make a ton of money doing it. But you just don’t hack it out at Home Depot and the DIY, I’ll, you know, give us a call. So, yeah. Did you like that story?
Mat Sorensen: Yeah, that’s a good one. Great. Great story. Taking it back 15 years. I like that. That was Mark’s way of demonstrating his deep experience in the field. If you if you didn’t catch on, that was a good little. You know, I’m just
Mark Kohler: Teasing what are the issues? What other issues you? Well, let
Mat Sorensen: Me ask one other issue I do want to talk about is, let’s say you want to kind of do some development on it. You’re like, Oh, I want to just hold the land like Mat. I’m kind of I get these all the time. We had a lot of real estate developer clients over the years that are like, I can use my IRA to do this like, yeah, you can do it now. I want to be careful for those who want to improve the property, whether it’s a paper development or physical improvements, you need to know a couple of things. Paper developments probably pretty, pretty easy to get away with as long as you hold the property for a few years. So let’s say my paper. I mean, let’s say you buy some land that’s like agricultural property or it’s zoned for residential and you want it to be commercial or vice versa. You know you’re you’re going to make a zone or use change of it. And so you’ve got to do some paperwork. You might have to have some engineering involved. You might have to go to a planning committee meeting or send a consultant or lawyer that you paid to go to that. So the paper development, you’re going to be OK, like, we’re OK with your IRA doing that.
Mat Sorensen: You’re not really physically improving it. So your IRA. Again, we want to make sure your IRA is not in the business of developing real estate. It’s simply investing in in the land. So paper development, as long as you hold it for a few years doing that paper development process, getting maybe a zone change or changing a density or whatever it is. Cool. All right. I’m not so concerned about UBIT. What if you’re like Mat, I want to sell it to a national homebuilder and this is I had a client just like this. They were a real estate developer. They buy land in their personal names all the time. They’re like, I want to do this with my IRA. This next deal? Ok? How much? How much improvement can I do? Well, you’re not building homes on it, that’s for damn sure. I don’t, because if you build homes and sell homes that you’re in the business of real estate development, you’re going to have you bid, which this UBIT tax, we’ve mentioned, is thirty seven percent. So. What can I do? Ok? Here’s is a middle of the road approach I took with one client after analyzing it for quite a long time.
Mat Sorensen: They did some physical improvements, putting in curb and gutter. Some utilities that do some environmental cleanup on the property, they held it for about four to five years and then they sold it to a national homebuilder. Now they put about six hundred thousand in the property to acquire it and put in these improvements. They sold it for over five million. This is two people’s Roth IRAs that went in and did this together. They had about a five. I think it’s about a four or five year hold on it and it’s like, it’s not UBIT because they had investment intent. They held it for a long time. They improved it a little bit, but they didn’t build it out. They were in the business of it. But they knew if they had teed it up that way, that a national homebuilder was more likely to come in and scoop it up and pay a higher premium on it. So that’s an example. They’re just got to be careful. If you’re want to do more development, just know there’s that UBIT issue and there’s a line you could cross where you could hit UBIT.
Mark Kohler: And it was all in a Roth IRA, which is freaking amazing. Awesome. Yeah, I I would. I don’t know if I have any other issues or concerns that you one would consider other than what we’ve already talked about. Oh yeah, I have one other one.
Mat Sorensen: Yeah, one other one. Sorry. No, this is good. Yeah, good. Good. One other one. I just say just the maintenance on it, you know. Oh, you can’t use it. You know, you can’t use it, can’t
Mark Kohler: Park your RV on it.
Mat Sorensen: Can’t park your RV on it, right? There’s actually a case of a dentist, of course, who owned the land next to his dental practice, and he would let employees park on the land that his IRA owned. And that was a prohibited transaction. So you can’t have use of it. Be careful on the adjacent lot. I get that one quite a bit where it’s like, Well, I own this property, but don’t want to buy the lot adjacent to my property with my IRA. Be careful on your
Mark Kohler: Use of that. When I say why?
Mat Sorensen: Yeah, right? Why? Yeah, well, are you going to put stuff on it? Are you going to use it personally? What does that be that one? Yeah. So you may say,
Mark Kohler: I just want to tie it up for review purposes, and I don’t want someone next to me and I could sell
Mat Sorensen: It a personal benefit. I’m a little concerned if you’re like, I just want to tie it up for the view. Your IRA really needs to be buying it just for your IRA’s investment. Yeah. A benefit to you. Last thing I was going to say was on just maintenance is you’re going to have some expenses. You’re at least have a property tax bill and just know that you don’t pay that this is a common one. The property tax bill, they just the client pays personally. Don’t do that. Oh my god. Have your IRA pay it. Or if you’re doing the IRA LLC, you have the IRA LLC pay the property tax bill.
Mark Kohler: Yeah, and you may say, well, my IRA doesn’t have enough money to do that. Well, then maybe you overbought, right? Get more money in it. Yeah. Leave a little cushion in your. And see that kind of goes back to step two. Have a plan because if you say, Well, I’m going to buy this raw land for 10 grand and you only have 10 grand in your IRA. Yeah, you better know. First, do I have the ability to make additional contributions next year to my IRA so it can pay the property tax? What is the property tax generally going to be? Does my Roth IRA going to have enough money to do that? And so you want to think of what’s and how long do I want to hold this? If it’s a five year hold, holy crap, you’re going to have five years of holding expenses in your IRA. Better have the cash wherewithal to do that, whether additional contributions or transfers. And that’s cool.
Mat Sorensen: Just have a plan.
Mark Kohler: Just have a plan like it. Well, yeah, I’d love it. And I think so. And I just don’t know if there’s always some issue you know, you could think about, but I think it’s a great strategy. We have a lot of clients doing it, a lot of clients buying land where they know again there could be some expansion, whether it’s with a freeway or a nearby development, a school, a Fortune 500 relocation, fortune five thousand relocation, billboard of cell tower, wind wind energy. Ooh, there’s a lot of solar panels. Yeah, wind turbine or solar panels. So I’ve had clients that have literally went shopping for land, and they’ve done a wind test study on it to see what the the rates are on it. And then they tie up all the land and go shopping it to wind turbine companies. So lots of cool ideas out there and sky’s the limit.
Mat Sorensen: So, yeah, yeah, yeah. Well, thanks everyone for, yeah, hold it.
Mark Kohler: You forgot the most part. What are we going to do it? Update on Britney
Mat Sorensen: Spears. Britney. Yeah, give everyone an update on Britney
Mark Kohler: For everybody was sticking around.
Mat Sorensen: That’s the only reason Marc agreed to do this podcast. All right. Can we give an update on Britney?
Mark Kohler: Well, it’s probably on my mind, and it was made me so mad went. I got home. I did a webinar last night late and I walked in the kitchen, started making some food late dinner and my wife and daughter in law were watching Britney vs. Spears, which just came out on Netflix. Literally, like, literally just came out like in the last week and. Of course, I’m a Britney fan, so I was like. Starting to watch, and I’m like, Oh my gosh, I got just physically upset, and because it is, it is amazing to see what she went through with her dad and this conservatorship. And there are legislative hearings now and laws being proposed in California to change the conservatorship procedure because this was just a gross example, an example of the gross misconduct that can occur anyway. So you take Britney out of it actually is a pretty phenomenal story. And the same thing happened to the lead singer of the Beach Boys, and there’s another movie out on his life story and how he went under conservatorship and how he escaped. So this has been an interesting problem in the state of California, which has some of the strictest conservatorship laws. But in a nutshell, yesterday was the day the judge finally removed the conservatorship. Or is it two days ago anyway? Some of you getting this podcast might be a few days later, but it’s just it’s just really exciting to see her get her freedom back. She scheduled her wedding. She couldn’t get married until this conservatorship was removed. I mean, is weird anyway. So.
Mat Sorensen: I thought it was all right.
Mark Kohler: Yeah. You OK with that? Was that a fair update?
Mat Sorensen: That was a great update. I was. I mean, and I’m happy for Britney. I wish her the best. Yeah, hopefully she is. She now going to start doing Vegas again? She was doing her Vegas shows and then like, she was like, like kind of protesting. I’m not going to perform.
Mark Kohler: Yeah. And when you watch
Mat Sorensen: The you’re in Vegas.
Mark Kohler: Yeah. And when you watch the Netflix, they go through her career the last 20 years when all this craziness started and how and why. And it’s very revealing how
Mat Sorensen: Many years
Mark Kohler: It’s it’s almost been. Well, the saga
Mat Sorensen: Has been OK since
Mark Kohler: 2005 ish. I mean, it’s pushing. It’s been crazy. But anyway, it’s been quite the saga. And her show, All of me in Vegas, she said, I’m going to not I’m not doing anymore until my dad is removed as the conservator and she was being held captive. And she just said that was her only real threat as I will not perform unless this is gone. And so that was a power move. Anyway, so the show’s back on. So we should hold a workshop in Vegas and get everybody’s tickets to the show. I’m just going to propose that right now.
Mat Sorensen: So I like it. I like it. All right. Well, thanks everyone. For those still listening, I hope you appreciated the Britney update free Britney. But also, you know, maybe learning how to buy land in your IRA too was helpful, but please get out, as we said before. Share this. Please subscribe if you’re watching it on YouTube and give us a five star review. If you’re still listening, I think you actually liked it. You didn’t. You didn’t turn it off. I mean, so you’re still here. So, and of course, will be at the self-directed IRA summit later in October. Go to SDRASummit.com, SDRASummit.com, where you can get your tickets. We’d love to see you there. Full day of training some networking charity golf tournament the day before. It’s going to be a heck of a good time with yours, truly. And Mark Jolly Kohler Woo.
Mark Kohler: All right. See there, buddy. And see you next week for another episode, maybe on NFTs. We’ll see if Mat approves the teaser.
Mat Sorensen: I like it, right? See you next from Mat.