Hybrid Flips: A Pathway to IRA Profits
Many real estate experts are starting to call the period dating back to late Spring of 2020 as “the great migration”. Shifts in how we work and what we value are changing where we want to live, and thousands of families are moving. Some want more space, some want a smaller community, and many are looking to reduce their housing cost now that work-from-home jobs mean they don’t need to be tied a big city location.
All this movement creates tremendous opportunity for savvy investors. Average home prices are up 13% nationally from May of 2020 to May of 2021 according to Zillow. Many markets like Austin, Phoenix and Tampa saw gains much higher than that.
When prices are rising this quickly, house flippers are normally busy. While flipping trends were strong in late 2020, they have slowed down in 2021 even though home prices continue to go up. That is a little unusual.
There are several likely reasons for this, namely stiff competition to buy and climbing costs of acquisition. It takes a lot of guts to buy in this kind of market and hope for a quick-turn profit. It also seems like a lot of investors are choosing to hold properties. Like home prices, rents are also increasing. If many predictions of another year of double-digit price gains are accurate, why not hold?
Flipping is not an IRA Friendly Strategy
As we have written on many occasions, house flipping is not particularly well suited to an IRA. The operation itself can tempt investors to be more hands-on than perhaps the IRS rules allow for. More importantly, income from flipping transactions executed on a regular or repeated basis can create taxable Unrelated Business Taxable Income (UBTI).
This tax occurs because flipping is a business, not a passive form of investment income. When a tax-exempt entity like a Self-Directed IRA or Solo 401(k) plan acts like a business and competes with tax-paying businesses, it is taxed on UBTI to level that playing field.
Because of the taxable nature of flipping, we have often encouraged alternative approaches that produce passive income not subject to UBTI.
A few months ago we wrote about the opportunity to have your IRA be the bank and lend to flippers, which is one such passive approach. The Hybrid Flip is another great option.
Where Flip Profits Come From
Flip profits come from two key aspects of the transaction. The old adage. “You make money when you buy” certainly holds true, though it is harder to do that right now. If you can acquire a property at discount, you lock in profit if you can sell later at market value.
Even in a seller’s market like we are in currently, there are opportunities. You just need to have the patience to find the right deal or an avenue to generate below market opportunities like a relationship with a good wholesaler or expertise in auction sales.
The other way you make money on a flip is by adding value with the correct level of repairs and updates.
In a well-executed flip, you should be able to acquire and update a property with a net price per foot at least 20% below what it would cost to purchase a similar property in move-in condition.
When Your IRA Profits Makes All the Difference
There is no issue with using an IRA or 401(k) to purchase a property at discount and have it fixed up – so long as you or disqualified parties are not the ones doing the fixing part. While you can manage the affairs of your IRA without conflict, if you provide value to the IRA in the form of contracting services that becomes a self-dealing issue in violation of IRS rules.
Where a flip becomes less than optimal for an IRA is not the acquisition path, but rather the exit strategy. If your IRA purchased, rehabilitates, and then sells a property, that is considered a dealer activity. If done with any frequency, UBTI is generated and can result in taxes of up to 37%.
But what if your IRA does not sell immediately?
The whole nature of the transaction is reconfigured if property is held as a passive rental for at least 12 months. If in the future the property is then sold, this is not considered a flip or dealer transaction that generates UBTI. Now your self-directed retirement plan is simply disposing of an asset that has been held to produce passive income.
Bingo! Now your IRA can capture the full gain created by a smart acquisition and rehab, without giving up a big chunk to taxation. The gain on sale as well as any rents accumulated during the hold accrue to your IRA fully tax-sheltered.
Why Now?
Success in any real estate transaction is affected by local conditions and not national trendlines. No single strategy is ever the best play at any given time in every market.
In the markets that are experiencing population inflows, however, the hybrid flip can be a great way to position your IRA for profitability. As demand for homes to purchase and homes to rent increases, this strategy puts you in a win-win. You might even find the opportunity to have your IRA rent to someone who is testing the waters in a new location and is not ready to buy… this year.
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Quick answers to common questions
We’ll take you through a simple, step by step process designed to put your investment future into your own hands…immediately. Everything is handled on a turn-key basis. You take 100% control of your Retirement funds legally and without a taxable distribution.
YES! In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) making IRA, 401(k) and other retirement plans possible. Only two types of investments are excluded under ERISA and IRS Codes: Life Insurance Contracts and Collectibles (art, jewelry, etc.). Everything else is fair game. IRS CodeSec. 401 IRC 408(a) (3)
It’s actually pretty simple. Early on, regulators let the securities industry take the lead in educating the public about retirement accounts. Naturally, brokers and banks promoted stocks, bonds, and mutual funds—giving the impression that those were the only allowed investments. That was never true... and still isn’t. You can probably guess why they kept the rest under wraps.
It is possible to use funds from most types of retirement accounts:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Keogh
- 401(k)
- 403(b)
- Profit Sharing Plans
- Qualified Annuities
- Money Purchase Plans
- and many more.
It must be noted that most employer sponsored plans such as a 401(k) will not allow you to roll youraccount into a new Self-Directed IRA plan while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
A Solo 401(k) requires a sponsoring employer in the format of an owner-only business. If you have a for-profit business activity – whether as your main income or as a side venture – and have no full-time employees other than potentially your spouse, your business may qualify. The business may be a sole-proprietorship, LLC, corporation or other entity type.
A self-directed retirement plan is a type of IRA or 401(k) that gives you greater control over how your retirement funds are invested. Unlike traditional accounts held at banks or brokerage firms that limit you to stocks, bonds, and mutual funds, self-directed plans allow you to invest in a wide range of alternative assets including real estate, private businesses, precious metals, cryptocurrency, and more.
These plans still follow the same IRS rules and maintain the same tax-deferred or tax-free benefits as conventional retirement accounts. The difference is simply in how and where you choose to invest.
No. Moving to a self-directed IRA or Solo 401(k) does not trigger any taxes, as long as your funds are eligible for rollover.
Self-directed retirement plans maintain the same tax-advantaged status as traditional plans offered by banks or brokerage firms. The key difference is flexibility—our plans are designed to give you greater control and allow for a wider range of alternative investments beyond stocks, bonds, and mutual funds.
A prohibited transaction is any action between your retirement plan and a disqualified person that violates IRS rules and can lead to serious tax consequences. Under IRS Code 4975(c)(1), prohibited transactions include:
- Selling or leasing property between your plan and a disqualified person Example: Your IRA cannot purchase a property you already own.
- Lending money or extending credit between the plan and a disqualified person Example: You cannot personally guarantee a loan your IRA uses to buy real estate.
- Providing goods or services between your plan and a disqualified person Example: You can’t use your personal furniture to furnish a rental property owned by your IRA.
- Using plan income or assets for the benefit of a disqualified person Example: Your IRA cannot buy a vacation home that you or your family use.
- Self-dealing by a fiduciary (using plan assets for their own benefit) Example: Your CPA shouldn't loan your IRA money if they’re advising the plan.
- Receiving personal benefit from a deal involving your IRA's assets Example: You can’t pay yourself from profits your IRA earns on a rental.
If a transaction doesn’t clearly fall within the allowed guidelines, the IRS or Department of Labor may review the situation to determine if it qualifies as a prohibited transaction.
Disqualified persons are individuals or entities that are prohibited from engaging in certain transactions with your IRA or 401(k). Doing so could trigger a prohibited transaction, which may result in taxes and penalties.
Here’s who is considered a disqualified person:
- You (the account holder)
- Your spouse
- Your parents, grandparents, and other ancestors
- Your children, grandchildren, and their spouses
- Any advisor or fiduciary to the plan
- Any business or entity owned 50% or more by you or another disqualified person, or where you have decision-making authority
These rules exist to prevent self-dealing and ensure your retirement plan remains in compliance with IRS regulations.
(Reference: IRC 4975)
Understanding and following these rules can be tricky, but it’s very doable. The best way to stay compliant is to work with professionals who specialize in self-directed retirement plans. They can help you navigate IRS guidelines and avoid prohibited transactions.
If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.
Yes. While self-directed retirement plans allow for a wide range of investments, there are a few important restrictions.
You cannot invest in collectibles or life insurance contracts, and you must avoid prohibited transactions—activities that benefit you personally rather than the retirement plan. These include things like buying or selling property to yourself or family members, using plan assets for personal gain, or self-dealing in any way.
Violating these rules could cause your entire IRA to lose its tax-advantaged status. To protect your account, it’s essential to work with professionals who understand IRS regulations and can help you stay compliant.
This is a common misconception. In many cases, professionals may simply be unfamiliar with self-directed retirement plans, as they fall outside their usual scope of work. CPAs and tax preparers are trained to file taxes, not necessarily to advise on alternative retirement strategies. Financial advisors and brokers often work for firms that focus on traditional investments like stocks and mutual funds—and may not benefit from or support alternative options like real estate or private lending.
Self-directed retirement investing is legal under IRS rules—but like any specialized area, it requires working with professionals who understand how it works.
The IRS has rules in place to make sure your IRA is used only for the exclusive benefit of the retirement account—not for personal gain or to help family members. These rules can get complicated because there are many ways a conflict of interest can occur, even unintentionally.
For example, if your IRA buys a house and rents it to your mother, you might be reluctant to evict her if she stops paying rent. That emotional connection creates a conflict between what’s best for your IRA and your personal relationships, something the IRS aims to prevent.
These rules help ensure your retirement account stays compliant and protected. (See IRC 408)
Yes. Most tax-deferred retirement accounts—such as Traditional IRAs, old 401(k)s, 403(b)s, and TSPs—can be rolled over into a self-directed IRA or Solo 401(k), depending on your eligibility. Roth IRAs cannot be rolled into these accounts.
You can contribute directly from earned income, subject to annual IRS contribution limits. The method and amount depend on the type of plan you have (e.g., Solo 401(k) vs. IRA).
To take a distribution, you'll request funds through your custodian or plan administrator. Distributions may be taxable depending on your account type and age. Early withdrawals may be subject to penalties.
For 2025, the Solo 401(k) max contribution limit is $81,250 if age 60-63, $77,500 if age 50-59 or 69+, and $70,000 if under 50. Traditional and Roth IRAs have a limit of $7,000 ($8,000 if age 50+). Limits are subject to IRS adjustments.
Yes. IRA contributions are typically due by your personal tax filing deadline (e.g., April 15). Solo 401(k) contributions follow your business tax filing deadline, including extensions.
IRS reporting requirements vary depending on the type of self-directed retirement plan you have. Here’s a quick breakdown of what you need to know
Please note: Our team can help you understand what’s required for your specific account, but we don’t provide tax or legal advice. We always recommend working with a qualified tax professional to ensure full IRS compliance.
Self-Directed IRA (Traditional or Roth)
- Form 5498 – Filed by your custodian each year to report contributions, rollovers, and the fair market value (FMV) of your account.
- Form 1099-R – Issued if you take a distribution or move funds out of your IRA.
- Annual Valuation – You'll need to provide updated FMV for any alternative assets held in the account, such as real estate or private placements.
Solo 401(k)
- Form 5500-EZ – Required if your plan assets exceed $250,000 as of year-end. Must be filed annually by the plan participant.
- Form 1099-R – Required if you take a distribution or roll funds out of the plan.
- Contribution Tracking – Keep records of employee and employer contributions. These are not filed with the IRS but may be needed for tax reporting or audits.
SEP IRA
- Form 5498 – Filed by your custodian to report contributions and FMV.
- Form 1099-R – Filed by your custodian. Issued for any distributions.
- Employer Contributions – Must be reported on your business tax return (and on employee W-2s, if applicable).
Health Savings Account (HSA)
- Form 5498-SA – Filed by your HSA custodian to report contributions.
- Form 1099-SA – Filed by your HAS custodian. Issued for any distributions.
- Form 8889 – Must be included with your personal tax return to report contributions, distributions, and how funds were used.
