Over the past ten years of working with professional and casual real estate investors we very often recommend a Self-Directed IRA LLC. If you are not familiar with the Self-Directed IRA LLC concept I encourage you to check out my article here on Realtytimes.com: http://forrestmoore.realtytimes.com/advicefromagents1/item/26561-using-your-401k-or-ira-to-buy-real-estate.
In short a Self-Directed IRA/LLC give the maximum legal liability protection the law allows your IRA to receive as well as direct checkbook control. Those are two things that are critical when investing in real estate. The Self-Directed IRA/LLC is great for rental properties, Tax Liens (http://forrestmoore.realtytimes.com/advicefromagents1/item/26573-what-are-tax-liens) and other investments that involve relatively passive income collection. However we often get questions about flipping properties. People want to know if they can use their tax protected IRA funds to buy and sell property quickly without the long term commitment to property ownership and management that is part and parcel with owning rental properties.
The reality is that buying and selling properties on a regular basis, as an identifiable pattern of activity, can cause the Self-Directed IRA to be treated as a business for tax purposes. So the answer is dependent of the frequency that you expect your IRA to flip properties, if it is a one-time event we’ll usually recommend that you go forward with the Self-Directed IRA/LLC. If however you expect to flip properties regularly, then an alternative structure may be desirable.
Whenever a retirement plan invests in a business the rules require that the company be set up as a Corporation or else the IRA faces a significant tax penalty on its profits. That penalty is called Unrelated Business Income Tax or UBIT and typically the penalty is going to be more than 30%. You can learn more about UBIT here: http://cureitfinancial.com/ubit-triggers-self-directed-irallc. So if you wish to run a real estate flipping business you may wish to consider a 401k Business Financing Plan. With a 401k Business Financing Plan you can often limit your business taxable income to 15% or less, take a salary and mix your retirement and non-retirement plan money in the same company. You can read more about it at http://401kfinancinginsiders.com.
When the 401k Business Financing Plan becomes too complicated for people, we typically will recommend that they consider avoid flipping properties in their IRA and stick with rentals, tax liens, loans and other more passive investments that do not run any risk of tax penalties inside an IRA.
