Posted by John Merchant on May 07, 2004 at 18:39:11:
You are right. I didn’t notice he said his IRA would by an option in his own corp’s deal…which would be prohibited since it would be dealing with self.
An option like this is a wonderful IRA investment, but can’t be with one’s own asset, or assets of one’s own corp.
Legal way to do it would be to have a non-related person, such as friend or lawyer set up the corp, then his IRA could buy option in its assets, and if there’s enough in the IRA, that money could actually be used to buy the assets for the corp.
I would like to do some retail rehab deals in my Roth IRA. The IRA only has $3,000 in it. Since the IRA will have to pay UBIT if it borrows money to buy and rehab house here is my alternative scenario. My corporation buys the house and does the rehab for a total cost of say $50,000. The IRA signs an option with the corporation to purchase the house for $50,000. A buyer is found to buy the house at the retail price of $80,000. At closing the IRA exercises the option and then sells house to homebuyer. Result: no tax due from corporation since it sold house for its basis and no tax due from IRA. This sounds too good to be true. Am I missing something other than I would need the buyers lender and the title company to go along with this.
Yes, good IRA investment - Posted by John Merchant
Posted by John Merchant on May 04, 2004 at 13:34:14:
This would be great use for IRA or Roth IRA, as ALL profit would belong to the IRA on which no tax would be due now.
Mere buying and selling of any single asset (including stocks or stock options)is NOT operating a business, and therefore not subject to UBIT if done inside IRA.
Now if the IRA holds a property which it then rents, that would probably be UBIT and taxable as such, since that would be operation of a business as per IRC.
I am interested in what the lawyers will say. If your IRA owned the house after the option was exercised, then you would be considered a dealer especially if you did this regularly. If you are a dealer, then it is my understanding that the IRA is running a business which is a no no. What about your selling the option to the buyer to make your money. This would solve the dealer problem. I don’t know whether the IRS would consider a corporation owned exclusively by you as a related party. I would be interested to hear what the lawyers think.