When investors with self-directed IRAs consider investing in real estate, they usually think of rental properties or homes they can flip instead of raw land. For many people it can be difficult to imagine the potential of vacant land and the healthy returns which may be available from this type of investment.
While raw land can require a longer investment timeframe than some other real estate investments, it offers great opportunities for those who understand and are willing to take on the commitment. There are a variety of prospective uses for raw land, including:
- Residential and Commercial Development Property
If growth is expected in the area of the raw land, it could be parceled off and sold or leased to building contractors and investors. Or, investors could choose to develop the land themselves.
- Oil and Mineral Producing Land
Investors may choose to lease mineral rights to mining companies or other investors.
Soft and hard woods can be planted, harvested, and sold for profit. Tracts of the land could also be leased to others such as timber companies.
Some other uses for raw land include:
- Raising crops
- Raising cattle or other animals
When considering investing in raw land, investors should understand not only the process, but the rules set forth by the IRS regarding this type of investment.
- All income and expenses relevant to the investment must flow directly into and out of IRA funds
- Avoid prohibited transactions and dealings with disqualified persons.
- Land purchased with the intent of running a business within an IRA is subject to Unrelated Business Income Tax.
- If the IRA took out a loan to purchase the asset, Unrelated Debt Financed Income Tax may apply.
For those interested in diversifying their portfolio by investing a self-directed IRA in raw land, contact Mountain West IRA. They can answers question investors might have before starting the process.