Key Points 

• Investing in raw land with a Self-Directed IRA offers tax-deferred or tax-free growth and portfolio diversification beyond Wall Street products.
• There are various types of raw land, each with its own potential benefits and considerations.
• A Checkbook IRA provides enhanced control and flexibility for managing everyday investment transactions.

Real estate comes in many shapes and sizes. Oftentimes, an attractive real estate investment starts with the imagination. Raw land offers unique and potentially lucrative investment opportunities. Picture owning a desirable plot of raw land in a growing suburban area or acquiring farmland in a fertile region. Whatever your vision may be, investing in raw land with a Self-Directed IRA (SDIRA) adds tax advantages to any potential gains from your investments.

While standard IRAs typically limit you to Wall Street products such as stocks, bonds, and mutual funds, SDIRAs open the door to a world of alternative assets. A type of SDIRA called a Checkbook IRA gives you even more freedom to manage your everyday investment transactions in real time, which can be ideal for raw land investments. Here’s how it all works.

What Is Raw Land in Real Estate?

Raw land refers to undeveloped property without any buildings or infrastructure. The land is vacant, unaltered, and unserved by public utilities. There are various types of raw land that can be categorized by their zoning regulations and intended use, including:

Residential Land

Residential land is designated for housing development and can be subdivided into lots for rental property such as single-family homes, multi-family units, or apartment complexes. One of the main benefits of residential land is its potential for appreciation, particularly in growing urban and suburban areas.

Commercial Land

Commercial land is intended for businesses. Think retail centers, office buildings, and industrial parks. Investing in commercial land or commercial real estate can potentially yield higher rental income compared to residential properties because of the higher lease rates typically expected of commercial tenants. These tenants often sign long-term leases, which can provide a predictable and stable income stream.

Agricultural Land

Agricultural land is used for farming and raising livestock, encompassing cropland, pastureland, and orchards. This type of land offers multiple benefits, including the ability to generate income through crop production or livestock farming. In some regions, agricultural activities may qualify for tax incentives. Additionally, agricultural land can sometimes be less affected by economic downturns due to the steady demand for food production.

Timberland

Timberland is forested land used for growing and harvesting timber. Timberland investments benefit from being a renewable resource, as timber can be periodically harvested and sold to provide income streams. Beyond timber sales, timberland can also generate income from hunting leases, recreational activities, and conservation easements.

Recreational Land

Recreational land is for activities such as hunting, fishing, camping, and other outdoor uses that can serve as revenue streams for investors. As outdoor recreational activities continue to gain popularity over generations, the value of recreational land can increase, offering potential for appreciation.

Undeveloped Land

Undeveloped land refers to land that has not been developed for any specific use and may require significant improvements before anything can be built. The primary benefit of undeveloped land is its flexibility for future development into various uses, such as residential, commercial, agricultural, or recreational. Typically, undeveloped land is less expensive than developed land because it requires extra work to become usable.

Why Use a Self-Directed IRA for Raw Land Investments?

If you’re looking to invest in raw land, you could of course conduct and complete the transaction personally. However, investing in raw land with a Self-Directed IRA adds a tax advantage. Your Self-Directed IRA can be a Self-Directed Roth IRA or Self-Directed Traditional IRA. Self-Directed Roth IRAs allow any gains to accumulate tax-free. Gains from Self-Directed Traditional IRAs are tax-deferred. Either tax advantage can help enhance any growth of your retirement savings.

The other main advantage of using a Self-Directed IRA is the level of freedom and flexibility it offers. With an SDIRA, you can tailor your investment strategy to your specific interests and financial goals, rather than feeling confined to watching Wall Street. The ability to invest in alternative assets, combined with the tax advantage, redefines the idea that many people may have of investing for retirement.

What Is a Checkbook IRA?

Raw land investments can move quickly once you decide what you’re going to do with your property. The fast-paced nature of building real estate presents an ideal use case for a Checkbook IRA. A Checkbook IRA is an SDIRA with checkbook control. Checkbook control is the ability to manage your everyday investment transactions without going through your Self-Directed IRA custodian.

To open a Checkbook IRA, you will open a Self-Directed IRA and then establish an entity, either an IRA LLC or an IRA Trust. This entity will hold the IRA assets and allow you to have direct control over the funds. For example, an IRA LLC is formed with the IRA as the sole member, and you, as the IRA owner, manage the LLC. Similarly, an IRA Trust is established with the IRA as the beneficiary, and you as the trustee.

Once the entity is established, you will then open a checking account in the name of your LLC or trust. You will fund the checking account by instructing your SDIRA custodian to transfer money from your SDIRA. After the setup process is complete and your entity’s checking account is funded, you can simply write a check or send a wire for transactions relating to your investments, such as paying for maintenance, improvements, or other expenses.

Essentially, a Checkbook IRA speeds up your ability to act on investment decisions in real time rather than operating under the classic SDIRA custodian process. The setup process may sound like a lot, but with Broad Financial, it’s extremely easy. We take you through each step and manage the entity creation for you. Learn more about opening a Checkbook IRA.

Considerations to Keep in Mind

When investing in raw land with a Self-Directed IRA or Checkbook IRA, it's helpful to be mindful of the following:

• Research: Comprehensive studies of market trends, zoning laws, and potential environmental issues can help identify risks and opportunities associated with the land.
• Risk Assessment: Evaluating potential market fluctuations, environmental concerns, and regulatory changes can aid in managing risks. Diversifying investments and adopting a long-term strategy might also be beneficial.
• Regulatory Compliance: Familiarity with IRS rules, especially those concerning prohibited transactions and disqualified persons, is crucial to protect the tax-advantaged status of a Checkbook IRA.
• Unrelated Business Income Tax (UBIT): Income generated through activities like leasing or development may be subject to UBIT. Consulting with a tax professional can provide clarity and help in optimizing the investment strategy.
• Professional Guidance: Insights from real estate experts, legal, and tax advisors with experience in Checkbook IRA investments and the raw land market can be valuable in the decision making process.

With careful planning and strategic investment decisions, raw land can become a strategic component of your retirement portfolio. And with added tax advantages and more freedom than you ever thought possible in a retirement account, investing in raw land with a Self-Directed IRA or Checkbook IRA can be exciting, empowering, and energizing. If you’re considering opening a Checkbook IRA for raw land investments and perhaps other alternative assets, schedule a discovery call with one of our experts today!