Selling Land

Self Directed IRAs vs. 1031 Tax Deferred Exchanges

Self Directed IRAs vs. 1031 Tax Deferred Exchanges

The Internal Revenue Code provides multiple tax deduction and deferment solutions for asset owners including Self Directed Individual Retirement Accounts (SDIRAs) and 1031 exchanges. Each option has its advantages and disadvantages, and the appropriate solution depends on the current asset ownership and the need for self-usage of the property.

SDIRAs have two primary advantages over 1031 tax deferred exchanges. First, the United States government allows the write off or tax deduction of any contribution for most IRAs. Second, when the SDIRA sells the appreciated asset, there is no tax due (unless purchased with a loan, then Unrelated Debt Finance Income (UDFI) or Unrelated Business Income Tax (UBIT) may apply), those profits are returned to the SDIRA. 1031 exchanges are the appropriate strategy when selling an investment property already owned and when debt is needed to acquire the replacement property. Disadvantages of a SDIRA are debt must be non recourse and there can be no self-usage of the property.

SDIRA Asset Types

SDIRAs have been around for over 30 years allowing individuals to invest in a variety of non traditional investments including:

  • Single and multi unit homes
  • Livestock
  • Commercial property
  • Improved or unimproved land
  • Mortgage, note or accts receivable
  • Foreign property investment
  • Tax liens
  • Gold or silver
  • Private placements
  • LLC and partnerships

Investments in collectibles such as artwork, rug or antique, metal or gem (the exception is gold, silver, platinum and palladium bullion), stamp or coin or any alcoholic beverage and insurance are prohibited.

Self-Directed Retirement Plans

The types of retirement plans that can be self-directed and the current contribution limits are:

Contribution LimitsContributions Taxed?Withdrawals Taxed?
Traditional IRA$5k – $6kNoYes
SEP IRA25% of earnings to $49kNo (deductible to employer)Yes
SIMPLE IRA$10.5k – $13k plus employer matchNo (company match deductible to employer)Yes
ROTH IRA$5k – $6kYesNo
Individual k$46k – $51.5kYour choiceBased on choice

 

Rules & Regulations

SDIRA owners should follow three primary rules in their investment activities. First, there can be no self dealing or personal use of the SDIRA asset. This includes parents, grandparents, children or grandchildren of SDIRA owner and/or spouse. Brothers, sisters, Aunts, Uncles, Cousins can use the property at fair market rent. Second, debt must be non recourse to the SDIRA (the titleholder is the SDIRA) which limits the number of available lenders. Third, the SDIRA cannot engage in any transaction (direct or indirect) with anyone related or considered a disqualified person. Examples of disqualified persons include:

  • You and your spouse
  • Lineal ascendants and their spouses
  • Lineal descendants and their spouses
  • Any fiduciary of the SDIRA
  • Anyone providing services to your SDIRA
  • Corporations, partnerships, trusts, or estates in which you own, directly or indirectly, at least 50%.

Basic steps to buy real estate or asset in a SDIRA are:

  1. Open/contribute or roll over funds from an existing plan held with a broker to a SDIRA.
  2. Locate investment.
  3. Make an offer on behalf of SDIRA.
  4. Complete buy direction letter.
  5. Review and approve title documents.
  6. Deed recorded in SDIRA name for example, Entrust Freedom LLC FBO Client Name, IRA #12345.
  7. Expenses paid from SDIRA.

Regulations require that third party custodians provide SDIRA account administration including annual reports to the IRS. The Entrust Group is an old established administrator with competitive fees. They provide free consulting on the many rules and effective strategies such as holding the asset in a limited liability company with checkbook privileges.

This content may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of LANDTHINK. Use of this content without permission is a violation of federal copyright law. The articles, posts, comments, opinions and information provided by LANDTHINK are for informational and research purposes only and DOES NOT substitute or coincide with the advice of an attorney, accountant, real estate broker or any other licensed real estate professional. LANDTHINK strongly advises visitors and readers to seek their own professional guidance and advice related to buying, investing in or selling real estate.

About the author

Andy Gustafson, CES

Andy Gustafson, Certified Exchange Specialist®, is a managing member of Atlas 1031 Exchange, LLC, a nationwide accommodator of Internal Revenue Code Section 1031. He founded the company in 2007, and has since expanded his professional services into Texas and the Midwest. He has spoken to hundreds of investors at Wealth Camps and Real Estate Investment Clubs nationwide and is a sought after speaker on the topic. As an approved continuing educational provider, he has helped hundreds of Realtors, Attorneys, and CPAs understand the application of the 1031 code. To date he has accommodated over 500 exchanges representing $433,000,000 in exchanged value and deferring over $22,000,000 in taxes.

3 Comments

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  • Thanks Andy for once again bringing self directed IRA’s back to the attention of investors. We have been selling land into SDIRA’s for years and find it a very effecient way to get the deal done when convential financing comes up a little short. With today’s stock market uncertainty, an SDIRA is something all investors should consider. That is where my retirement is. One more thing – regarding the “use” issue: Any prudent investor will take care of their investment (livestock must be fed, etc.) and land is no exception. A tree farm requires time spent on the land inspecting it, keeping up roads and firelanes and even cotrolling the wildlife populations to prevent damage to the timber stand, etc.

    • Hello Rick, SDIRAs are a valuable tool to invest and hold real estate. I agree with your view of self dealing that real estate holdings must be maintained. Often the question is whether a condominium can be used by the taxpayer and the answer is no. Thanks for your comment.

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