Many people have great success purchasing real estate in self-directed IRAs. Real estate is the most popular asset in these accounts as the potential gains can be somewhat greater than traditional bonds or mutual funds, and the right investment is considered a bit safer than betting on the stock market. In addition to simply using your IRA to acquire real estate, you can also use a limited liability company (LLC) owned by your IRA to do so. There are a few reasons why sophisticated investors do just that.
Benefits of an IRA-owned LLC
- LLC owners may enjoy the status and protection in much the same way a corporation does.
- The IRA owner obtains what is known as “checkbook control” over the funds in the account, enabling investors immediate and easy access to capital to facilitate timely real estate acquisitions.
- The ability to write checks directly from the account avoids transaction and other fees generally incurred in a self-directed IRA.
How it works
- Your self-directed IRA forms an LLC (listing the IRA as the member in the LLC).
- The self-directed account owner (or another party) becomes the manager of the LLC.
- The self-directed IRA deposits funds into a bank account established in the name of the LLC.
- The manager identifies investments and writes checks drawn out of the LLC’s account to make purchases.
As easy as this process sounds, do not underestimate the fact that there are risks attached to the benefits. In fact, because the laws governing IRA account owners serving as LLC managers are somewhat unsettled, consulting with a legal advisor before pursuing this route is highly recommended.
Additionally, as manager of the account, and owner of the self-directed IRA, it is imperative you be familiar with prohibited transactions and disqualified persons the account is not permitted to deal with. The compliance rules can be pretty complex and making a mistake can cause penalties and even disqualification of your account. Internal Revenue Code 4975 provides in-depth information regarding how these transactions can affect your IRA’s tax-exempt status.
Maintaining an IRA-owned LLC
First of all, it is critical that the LLC be structured properly. Seeking proper advice from a legal or tax professional to do so is crucial. Additional requirements when purchasing real estate with an LLC include:
- Unrelated business income tax (UBIT) and unrelated debt financed income (UDFI) apply if the LLC debt-financed the investment.
- Dividends must be distributed to owners in accordance with the percentage of their ownership stated in the LLC agreement.
- The account must comply with all IRS and Department of Labor tax rules and regulations.
If you are interested in using an LLC owned by your self-directed IRA to make real estate investments, you should do extensive research and engage the services of a legal or tax professional familiar with the process to help minimize the risks associated with these entities. Advanta IRA does not give any legal endorsement or review to these types of entities, but you may use your IRA to invest in them if you feel comfortable doing so.
For those who want to learn more, Advanta IRA provides educational courses on IRA-owned LLCs. Visit our event calendar for upcoming seminars and webinars on the subject.
If you would like to learn more or have questions regarding this article, please contact us.