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 www.irawebadvisor.com.
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!