How Does a Self-Directed IRA Land Purchase Work?

Key Points

A Self-Directed IRA land purchase should be in the name of your Self-Directed IRA.

Raw land expenses must go through your custodian or, if you have a Checkbook IRA, through a checking account tied to your IRA LLC or IRA Trust.

You can develop your purchased land while it’s in your IRA, but be mindful of taxes that might arise.

Have you ever considered purchasing raw land? It can be an intriguing investment opportunity, especially when combined with the tax advantages of an IRA. To buy land with an IRA, though, you’ll want to open a Self-Directed IRA, which allows you to invest in alternative assets like raw land.

plot of green farmland with a square sectioned off by lines and location markers in the corners of the square

Owning land in a Self-Directed IRA can be as hands-on or hands-off as you want it to be. Whether you envision building on the land, dividing it into subplots, or simply holding onto it knowing that land tends to have value as a finite resource and asset, you can do as you please while watching your retirement savings grow. Here’s what you need to know when purchasing land in a Self-Directed IRA:

Documentation

Any raw land that you purchase through your Self-Directed IRA should list your Self-Directed IRA, as the buyer and owner on the title and all other documentation. The custodian is responsible for writing a check or wiring the funds to the seller on your direction to complete the purchase. The following steps are important to follow closely to avoid a prohibited transaction.

Expenses

Raw land investment with greenery in the front and mountains in the background

Once you complete your Self-Directed IRA land purchase, any expenses relating to that land must also run through your IRA. If you’re keeping the land vacant, the expenses should mostly be limited to property taxes and insurance, making this part clean and easy—but if you’re developing on the land, there may be ongoing expenses for you to keep track of and send to your custodian.

There’s also a way to pay expenses from your IRA without having to go through your custodian each time. It’s called checkbook control, or a Checkbook IRA.

Checkbook Control

Let’s say you’re buying land not just to let it sit, but to build it into a bigger investment such as a commercial building or apartment complex. This is a common use case to take a few extra steps for checkbook control, giving you the ability to simply write checks and send wires freely with no custodian involvement.

To gain checkbook control, you’ll need to set up an IRA LLC or IRA Trust, followed by a checking account in the name of your LLC or Trust. The benefit of a Checkbook IRA is that you can move faster while saving on transaction fees, especially for check-intensive projects like building on raw land. If you’re interested but unsure about checkbook control, don’t worry; you can open a classic Self-Directed IRA and convert it into a Checkbook IRA at any time.

Tax Considerations

Depending on what you do with your land, income that you generate from it may be subject to Unrelated Business Income Tax (UBIT). If you buy your Self-Directed IRA land purchase with debt financing such as a non-recourse loan, your IRA may be subject to Unrelated Debt-Financed Income (UDFI) tax.

It’s always a good idea to speak with a trusted accounting/tax professional before making investment decisions. In the meantime, read about investing in real estate with a Self-Directed IRA. Raw land is just one of the many property types you can hold in this exciting retirement account!

Want to learn more about purchasing land with your SDIRA?

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Disclaimer: All of the information contained in our website is a general discussion for informational purposes only. Madison Trust Company does not provide legal, tax or investment advice. Nothing of the foregoing, or of any other written, electronic or oral statement or communication by Madison Trust Company or its representatives, is intended to be, or may be relied as, legal, tax, investment advice, statements, opinions or predictions. Prior to making any investment decisions, please consult with the appropriate legal, tax, and investment professionals for advice.