All posts by Quincy Long

Flipping Real Estate Options in an SDIRA

You asked:


” Hi,


Quincy Long said in the following article* that you can flip real estate options in a SD-IRA.  Can this be done multiple times per year without being classified as a “dealer” ?  Because it’s options and not physical real estate would the “dealer” status not apply ?


Also, if the option flipping is done frequently, would I incur UBIT because I’m carrying on an “active business” ?


Are there ways to avoid UBIT and still do multiple option flips in a SD-IRA ?




My answer:


You ask some very good questions in your email about flipping options.  The key to understanding the rules for self-directed IRAs is to always remember that an IRA is intended to be for investment purposes only.  People make the mistake all the time of trying to effectively run a business using their personal services for the benefit of their IRA, which is a prohibited transaction.  The Tax Court has given the IRS a win in a number of cases where people have done this.


IRS Publication 598 may be of some assistance in answering your questions about Unrelated Business Income Tax as it applies to options.  According to Publication 598, “Unrelated business income is the income from a trade or business regularly conducted by an exempt organization and not substantially related to the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity.”  So the question as it pertains to options is whether or not the activity would be considered a ‘trade or business’ which is ‘regularly conducted.’  One way of determining how the IRS might view this is to ask your CPA how he would report the income on your personal income tax return if it was done outside of the IRA.  If his answer is that it would be reported on Schedule C, then it almost certainly will cause the IRA to owe UBIT, and may cause even more problems, depending on the circumstances.


Specifically on options, IRS Publication 598 states (on page 10), when speaking of exclusions from UBI, “Lapse or termination of options. Any gain from the lapse or termination of options to buy or sell securities is excluded from unrelated business taxable income. The exclusion applies only if the option is written in connection with the exempt organization’s investment activities. Therefore, this exclusion is not available if the organization is engaged in the trade or business of writing options or the options are held by the organization as inventory or for sale to customers in the ordinary course of a trade or business.” [emphasis added] While not precisely speaking about real estate options, it is pretty clear that if you trade options at a level where they would be considered as inventory for sale to customers in the ordinary course of a trade or business it will cause the IRA to owe taxes.  This is analogous to a flipper of real estate.  Think of the company who ‘buys ugly houses.’  To a franchisee of that organization, a house is just inventory, because they are a real estate dealer.  I think if you trade too many real estate options you could land in the same situation as a real estate flipper.


So how many options can you do? How much can you do before you are providing ‘services’ to your IRA in violation of the prohibited transaction rules, as opposed to merely making investment decisions?  These are questions that cannot be answered with certainty.  The best guideline I can provide you with is to make sure all of your IRA transactions are structured and treated as investments, and not the resale of inventory.  Purchasing and selling an option on real estate once is most likely not a business activity, and you are not likely to be considered to be providing a service to your IRA other than investment selection.  Do that same transaction 25 times in the same year in the same account and it changes character.  Where the line is I cannot tell you.  Remember also that you can self-direct a traditional IRA, a Roth IRA, a SEP IRA, a SIMPLE IRA, an individual 401(k), an HSA, and a Coverdell Education Savings Account (CESA).  You may have multiple accounts for you and your family.  Unless you are very active, in general you should have no problems with having your IRA become a dealer in options.


The best advice is to have a mix of different types of investments in your IRA.  If you hit a home run on some of them then that’s great for your retirement.  Good luck with your investments!

Using the same Trustee for various entities

Hello Quincy,

It was great spending time with you on the cruise.  We all

enjoyed it immensely.  Can’t wait for the next one.

Question below:  Names have been changed to protect the innocent.

1) Ann is trustee of our land trust for our LLC in Georgia (normal entity not in our Roth).

Can we also do transactions with Ann in our Roth IRA?

2) Can we do transactions with the same person/entity inside and outside of the Roth?




Great questions!  I’m not so sure about protecting the ‘innocent’ though.


Anyway, to answer your first question, you have to go to Internal Revenue Code Section 4975(e)(2)(G)-(H).  Per 4975(e)(2)(G), a trust of which 50% or more of the beneficial interest is owned directly or indirectly by a fiduciary of the IRA (which includes ownership by close family members of the fiduciary/IRA owner) is a disqualified person.  So, assuming you or you and your husband own 50% or more of the trust through the LLC, the trust would be a disqualified person to your IRA.  No surprise there.  When you have a disqualified entity, you then must look further to see who in the entity also becomes a disqualified person to your IRA.  Per 4975(e)(2)(H), an officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a 10 percent or more shareholder, or a highly compensated employee (earning 10% or more of the yearly wages of an employer) of any disqualified entity becomes a disqualified person to the IRA as well.  In this case I would argue that the trustee of an otherwise disqualified trust would be considered to be “an individual having powers or responsibilities similar to those of officers or directors” and therefore would be considered a disqualified person to your IRA.  So just based on the information provided it appears that a transaction with Ann would be a prohibited transaction.


The answer to your second question is, it depends (of course).  There would be many circumstances when a transaction outside of an IRA would not cause the person to become a disqualified person to the IRA.  For example, if I just simply made a hard money loan to an individual outside of my IRA, that person does not, merely by virtue of that loan, become a disqualified person to my IRA.  In other situations dealing with the same person inside and outside of the IRA might be a prohibited transaction.  Unfortunately, there is no way to answer your second question absent the specific facts of the transactions in question.


I realize that may not be the answer you’re looking for, but that’s why they call me Dr. kNOw.  J As always, keep in mind that I cannot give you tax, legal or investment advice.  Hopefully the information about will help guide your legal counsel anyway.  Have a great day!”

Using IRA to invest in Laundromat Business?


I appreciate if you can answer my two questions below:

1- Can I use my IRA and invest in a Laundromat business as my down payment and borrow rest from SBA?

2- Can I buy a 2nd home with my SDIRA?


1) Not directly in the IRA, no.  Your IRA is to be invested for your future, not for your current benefit (or to benefit any other disqualified person).  Some people say that you can set up a ROBS arrangement (Rollovers for Business Startup).  This works like this:  a) you set up a C corporation; b) you appoint yourself the sole director and officer; c) you have the corporation adopt a 401(k) plan; d) you roll your IRA into the 401(k) plan; e) you, as trustee of the 401(k) plan, purchase all of the shares of the C corporation; and (f) you hire yourself to run the corporation.  If this sounds a bit complicated to set up and a little expensive, that’s because it is.  The IRS has issued some guidance on concerns it has with ROBS arrangements, so if you go down that path you will need to work with someone who is very knowledgeable about this area and can satisfactorily address the IRS’ concerns.  Investing your retirement money into what is essentially a start up business certainly can be risky.  I would encourage you to do some research on ROBS arrangements and do some soul searching before setting this up.  Many companies offer to set up ROBS arrangements.  One such firm in Houston is DRDA, Inc.,  I am not qualified to make a judgment as to the validity of the structure, so that is something you must decide for yourself.  Good luck!


2) Self-directed IRAs do buy real estate all the time.  However, if you are asking can you buy a second home which you intend to use periodically personally then the answer is no, for the same reason the first answer is no.  You cannot either directly or indirectly gain a personal benefit from your IRA’s assets, other than in the form of a distribution from the IRA.


Good luck with your investments, and let me know if you have any further questions.


Have a great day!


MAJOR CHANGE in interpretation of 60 day rollover rule



The Tax Court ruled in the case of Bobrow v. Commissioner, T.C. Memo 2014-21, that the one-time per 12 calendar month 60-day rollover rule applies to ALL of the taxpayer’s IRAs, and not to each IRA separately.  This is in direct conflict with information contained in IRS Publication 590 and in Proposed Regulation 1.408-4(b)(4)(ii).

UPDATE:  In IRS Announcement 2014-15, the IRS has indicated that it will withdraw Proposed Regulation 1.408-4(b)(4)(ii) and will interpret the 60-day rollover rule in accordance with Bobrow.  However, in order to give IRA custodians and trustees time to update their administrative procedures and their IRA disclosure documents, the IRS has announced that it will delay the application of the Bobrow interpretation of the 60-day rollover rule until January 1, 2015.

A summary of the ruling is below:

Bobrow, TC Memo 2014-21

The Tax Court has ruled that Code Sec. 408(d)(3)(B)’s one-rollover-per-year rule applies to all of a taxpayer’s IRAs, not to each of his IRAs separately.

Facts. Alvan and Elisa Bobrow, husband and wife, were a married couple who filed a joint federal income tax return. On Apr. 14, 2008, he requested and received two distributions from his traditional IRA in the combined amount of $65,064. On June 6, 2008, he requested and received a $65,064 distribution from his rollover IRA. On June 10, 2008, Alvan transferred $65,064 from his individual account to his traditional IRA. On July 31, 2008, Elisa requested and received a $65,064 distribution from her traditional IRA. On Aug. 4, 2008, they transferred $65,064 from their joint account to Alvan’s rollover IRA. On Sept. 30, 2008, Elisa transferred $40,000 from Taxpayers’ joint account to her traditional IRA.

The taxpayers did not report any of the distributions as income. They claimed that they implemented tax-free rollovers of all of the distributions. IRS asserted that the June 6 distribution to Alvan and the July 31 distribution to Elisa were taxable.

Background. Generally, Code Sec. 408(d)(1) provides that any amount distributed from an IRA is includible in gross income by the distributee. However, Code Sec. 408(d)(3)(A) allows a payee or distributee of an IRA distribution to exclude from gross income any amount paid or distributed from an IRA if the entire amount is subsequently paid (i.e., rolled over) into a qualifying IRA, individual retirement annuity, or retirement plan not later than the 60th day after the day on which the payee or distributee receives the distribution.

Code Sec. 408(d)(3)(B) limits a taxpayer from performing more than one nontaxable rollover in a one-year period with regard to IRAs and individual retirement annuities. Specifically, Code Sec. 408(d)(3)(B) provides: “This paragraph [regarding tax-free rollovers] does not apply to any amount described in subparagraph (A)(i) received by an individual from an individual retirement account or individual retirement annuity if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in that subparagraph from an individual retirement account or an individual retirement annuity which was not includible in his gross income because of the application of this paragraph.”

The reference to “any amount described in subparagraph (A)(i)” refers to any amount characterized as a nontaxable rollover contribution by virtue of that amount’s being repaid into a qualified plan within 60 days of distribution from an IRA. The one-year limitation period begins on the date on which a taxpayer withdraws funds from an IRA. (Code Sec. 408(d)(3)(B))

June 6 distribution to husband failed the one-rollover-per-year rule. The Tax Court ruled in favor of IRS, that the June 6 distribution was taxable because Alvan failed the one-rollover-per-year rule.

The Bobrows asserted that the Code Sec. 408(d)(3)(B) limitation is specific to each IRA maintained by a taxpayer and does not apply across all of a taxpayer’s IRAs. Therefore, they argued, Code Sec. 408(d)(3)(B) did not bar nontaxable treatment of the distributions made from Alvan’s traditional IRA and his rollover IRA. The taxpayers did not cite any supporting case law or statutes that would support their position.

The Court said that the plain language of Code Sec. 408(d)(3)(B) limits the frequency with which a taxpayer may elect to make a nontaxable rollover contribution. By its terms, the one-year limitation laid out in Code Sec. 408(d)(3)(B) is not specific to any single IRA maintained by an individual but instead applies to all IRAs maintained by a taxpayer. In support of this theory, the Court emphasized the word “an” in each place that it appears in Code Sec. 408(d)(3)(B).

The Court then explained its rationale for concluding that the June 6 distribution, rather than the Apr. 14 distribution, was taxable. When Alvan withdrew funds from his rollover IRA on June 6, the taxable treatment of his April 14 withdrawal from his traditional IRA was still unresolved since he had not yet repaid those funds. However, by recontributing funds on June 10 to his traditional IRA, he satisfied the requirements of Code Sec. 408(d)(3)(A) for a nontaxable rollover contribution, and the April 14 distribution was therefore not includible in the taxpayers’ gross income. Thus, Alvan had already received a nontaxable distribution from his traditional IRA on April 14 when he received a subsequent distribution from his rollover IRA on June 6.

Finally, the Court took note that Alvan received two distributions on April 14. It said that it would be inappropriate to read the Code Sec. 408(d)(3)(B) limitation on multiple distributions so narrowly as to disqualify one of the April 14 distributions as nontaxable under Code Sec. 408(d)(3)(A). So, it treated the amounts distributed on April 14 as one distribution for purposes of Code Sec. 408(d)(3)(A).

The July 31 distribution to wife was repaid too late. IRS put forth two arguments as to why the July 31, 2008, distribution was ineligible for nontaxable rollover treatment: (1) the funds were not returned to a retirement account maintained for Elisa’s benefit, and (2) repayment of funds was not made within 60 days.

As to argument (1), IRS asserted that because she distributed the funds first to the taxpayers’ joint account and the taxpayers thereafter transferred $65,064 from their joint account to husband’s rollover IRA, the July 31 distribution was paid into an IRA set up for Alvan’s benefit and not into an IRA set up for Elisa’s benefit. The Court disagreed with that argument: it said that money is fungible, and the use of funds distributed from an IRA during the 60-day period is irrelevant to the determination of whether the distribution was a nontaxable rollover contribution.

The Court did agree with IRS’s second argument. Partial repayment was not made until Sept. 30. Sixty days after July 31 was Sept. 29

How many Real Estate transactions can I complete in a calendar year?



With my Quest Roth IRA and utilizing the PPT, how many real estate transactions can I complete in a calendar year. Specifically optioning  a property then, assigning the option and pocketing the assignment fee.





There is nothing that indicates a specific limit on how many such transactions you can do BUT (and it’s a big BUT) there are some potential areas of concern.  An IRA is meant to be for investments only, and not necessarily for running a business.  So if you are in the business of buying and selling property, or buying and selling options on property, then your IRA may be subject to unrelated business income tax on its profits from that business.  So how many can you do before it’s considered to be a business?  Nobody knows.  It has to do with intent, and volume, and how exactly the business is handled.  The best hint I can give you is that if you would report your activity as business income outside of your IRA, then it is almost certainly business income inside your IRA, and taxes will be owed by your IRA on its business profits. You should consult with your CPA on this issue.


Another issue you will want to consult with your CPA on is the tax filing requirements for your personal property trust.  My experience has been that many people using trusts ignore completely the tax filing requirements for trusts.  If your trustee is using Optional Filing Method 1 instead of filing a 1041 for the trust, then you don’t have to report anything to the IRS, but you will want to make sure that option is available for your trust activity reporting and that the conditions for using this option are acceptable to you.  I did write an article on this topic and if you like I can send you a copy of it.  Or you can just look it up on my blog at


A bigger issue involves who is doing the activity.  If you are essentially running a business inside of your Roth IRA, then you may be considered to be contributing your services to the Roth IRA.  This has the potential to be considered by the IRS as an excess contribution under IRC Section 4973, or a prohibited transaction under the prohibited transaction rules of IRC Section 4975(c)(1)(C) (the provision of goods, SERVICES, or facilities between a plan and a disqualified person).  It may also be considered an abusive Roth transaction which falls under IRS Notice 2004-8, in which case it is a listed transaction that you must specifically report in order to avoid severe penalties.


If it sounds like I’m trying to scare you off of using options, I am not.  I am simply pointing out that you cannot donate your personal services to your Roth IRA where the IRS will never get its share of the money.  You may make as much money as you like on your INVESTMENT activity.  You may even own a business in your Roth IRA, but you personally cannot run that business, and the business must pay taxes on its income, either through the entity that owns the business or directly by the Roth IRA if the entity running the business is non-taxable.  There is often a very fuzzy line between investment selection (which is no problem) and providing services.  Some people are willing to dance closer to the line than others, and there are no definitive answers.  The analysis is very fact specific, so there is no bright line answer to your question.


One thing I think is fair to say is that “piglets get fed but hogs get slaughtered.”  By that I mean that too much of a good thing can cause the IRS to take the position that what might otherwise be investment activity changes its character to business activity.  The higher the dollar amount involved the higher the level of interest by the IRS will be if they audit.  Generally it is a good idea to have more than just one type of investment activity to avoid the appearance that you are simply creating options as inventory to be sold off for a profit.


As you know I cannot give you tax, legal or investment advice.  Hopefully the information above will give you and your tax or legal advisors some areas to analyze.  Good luck with your investments, and have a great day!


“Danger, Will Robinson! Danger!” – New Reporting Requirements for Self-Directed IRAs

                In the 1960’s television series “Lost in Space” the robot, who acts as a surrogate guardian for young Will Robinson, utters the phrase “Danger, Will Robinson! Danger!” when the boy is unaware of a pending threat in one episode.  I was reminded of this classic phrase when I read about the new reporting requirements beginning in 2014 for self-directed IRAs.  The new requirements, while optional for 2014, will likely become mandatory for 2015.  So are these requirements and what do they mean for owners of self-directed IRAs?

                 Custodians are required to report to the IRS any distributions taken from IRAs.  At the end of each year a Form 1099-R is sent to the IRS and to the IRA owner which reports the value of any distributions taken during the year, among other things.  The distribution codes reported on Form 1099-R in box 7 indicate the type of distribution taken.  The new reporting requirements add code K to the list of possible codes.

New code K is used to report distributions of IRA assets not having a readily available fair market value, including private stocks, short or long-term debt obligations, ownership interests in limited liability companies (LLCs), partnerships, trusts, or similar entities, real estate, and option contracts.  Distribution code K will be used in conjunction with the distribution codes for premature or normal distributions from pre-tax accounts, such as traditional IRAs, conversions to a Roth IRA, death distributions to beneficiaries, and rollover distributions from an IRA into a qualified employer plan like a 401(k).  With the use of these codes, it will be easier for the IRS to flag these transactions for audit to make sure an appropriate value was reported for taxation purposes.  This increases the importance of accurately reporting the value of non-traditional assets which are converted or distributed from an IRA.  Having an updated fair market value with good backup documentation of how the value was arrived at will be critical in the case of an audit.  If the distribution is in the form of cash or assets having a readily available fair market value such as publicly-traded stocks, code K will not be used.

Form 1099-R is only used when a distribution or conversion from an IRA takes place.  However, every IRA owner receives a Form 5498 which reports the annual contributions to the account and the fair market value of the assets at the end of the year.  Beginning in 2014, new boxes 15a and 15b will be added to Form 5498 to report on those non-traditional assets held within the account that are generally “not traded on an established securities market.”  Box 15a is used to report the fair market value of the non-traditional assets reported in Box 15b.  There are special codes to indicate the type of non-traditional assets that are being held by the IRA.  The new codes are:  A – private stock; B – short or long-term debt obligations (for example, promissory notes); C – ownership interest in a limited liability company (LLC) or similar entity; D – real estate; E – ownership interest in a partnership, trust, or similar entity; F – option contracts; or G – other assets that do not have a readily available fair market value.  Up to two codes may be in box 15b.  If more than two types of the described assets are owned by the IRA, then the custodian will report code H.  Like the addition of distribution code K to the 1099-R, the changes to the 5498 make it imperative that accurate fair market values of non-traditional assets with documentation of how the value was established are reported to the custodian each year.

The additional information on Form 5498 will allow the IRS to better understand what percentage of IRAs hold non-traditional assets, the purported fair market value of those assets, and what types of assets are held.  This will enable the IRS to more efficiently allocate their audit resources.  Even for those who diligently follow all of the rules, the prospect of raising the audit profile of self-directed IRAs is nerve-racking.  Fortunately, for the vast majority of self-directed IRA owners, there truly is no danger from these new reporting requirements.  However, there will likely be increased regulatory pressure to accurately report fair market values.

With the advent of the new reporting requirements in 2014 for self-directed IRAs, it is all the more important to work with knowledgeable custodians or administrators like Quest IRA, Inc. (  Learning the rules well enough to stay out of trouble and working with competent advisors is critical.  Take advantage of all the FREE education and resources offered by Quest IRA.  Good luck with your investing!

H. Quincy Long is a Certified IRA Services Professional (CISP) and an attorney. He is also President of Quest IRA, Inc. (, a self-directed IRA third party administrator with offices in Houston, Dallas, and Austin, Texas, and in Mason, Michigan. He may be reached by email at Nothing in this article is intended as tax, legal or investment advice.

© Copyright 2013 H. Quincy Long. All rights reserved.