Using a Self Directed IRA LLC To Purchase Real Estate

Most people mistakenly believe that their IRA must be invested in bank CDs, the stock market, or mutual funds. Few Investors realize that the IRS has always permitted real estate to be held inside IRA retirement accounts. Investments in real estate with a Self Directed IRA LLC are fully permissible under the Employee Retirement Income Security Act of 1974 (ERISA). IRS rules permit you to engage in almost any type of real estate investment, aside generally from any investment involving a disqualified person.

In addition, the IRS states the following on their website : “…..IRA law does not prohibit investing in real estate but trustees are not required to offer real estate as an option.”

Advantages of Using a Self Directed IRA LLC to Purchase Real Estate

Income or gains generated by an IRA generate tax-deferred/tax-free profits. Using a Self Directed IRA LLC to purchase real estate allows the IRA to earn tax-free income/gains and pay taxes at a future date (in the case of a Roth IRA the income/gains are always tax-free), rather than in the year the investment produces income.

With a Self-Directed IRA LLC, you can invest tax-free and not have to pay taxes right away – or in the case of a Roth IRA - ever! All the income or gains from your real estate deals flow though to your IRA tax-free!

Types of Real Estate Investments

Below is a partial list of domestic or foreign real estate-related investments that you can make with a Self Directed IRA LLC:

Raw land
residential homes
Commercial property
Apartments
Duplexes
Condos/townhomes
Mobile homes
Real estate notes
Real estate purchase options
Tax liens certificates
Tax deeds

Investing in Real Estate with a Self Directed IRA LLC is Quick & Easy!

Purchasing real estate with a Self Directed IRA LLC is essentially the same as purchasing real estate personally.

Set-up a Self Directed IRA LLC with the IRA Financial Group
Identify the investment property
Purchase the investment property with the Self Directed IRA LLC – no need to seek the consent of the custodian with a Self Directed IRA LLC with “Checkbook Control”
Title to the investment property and all transaction documents should be in the name of the Self Directed IRA LLC. Documents pertaining to the property investment must be signed by the LLC manager
All expenses paid from the investment property go through the Self Directed IRA LLC. Likewise, all rental income checks must be deposited directly in to the Self Directed IRA LLC bank account. No IRA related investment checks should be deposited into your personal accounts.
All income or gains from the investment flow through to the IRA tax-free!

Structuring the Purchase of Real Estate with a Self Directed IRA LLC

When using a Self Directed IRA LLC to make a real estate investment there are a number of ways you can structure the transaction:

1. Use your Self Directed IRA LLC funds to make 100% of the investment

If you have enough funds in your Self Directed IRA LLC to cover the entire real estate purchase, including closing costs, taxes, fees, insurance, you may make the purchase outright using your Self Directed IRA LLC. All ongoing expenses relating to the real estate investment must be paid out of your Self Directed IRA LLC bank account. In addition, all income or gains relating to your real estate investment must be returned to your Self Directed IRA LLC bank account.

2. Partner with Family, Friends, Colleagues

If you don’t have sufficient funds in your Self Directed IRA LLC to make a real estate purchase outright, your Self Directed IRA LLC can purchase an interest in the property along with a family, friend, or colleague. The investment would not be made into an entity owned by the IRA owner, but instead would be invested directly into the property.

For example, your Self Directed IRA LLC could partner with a family member, friend, or colleague to purchase a piece of property for $150,000. Your Self Directed IRA LLC could purchase an interest in the property (i.e. 50% for $75,000) and your family member, friend, or colleague could purchase the remaining interest (i.e. 50% for $75,000).

All income or gain from the property would be allocated to the parties in relation to their percentage of ownership in the property. Likewise, all property expenses must be paid in relation to the parties’ percentage of ownership in the property. Based on the above example, for a $2,000 property tax bill, the Self Directed IRA LLC would be responsible for 50% of the bill ($1000) and the family member, friend, or colleague would be responsible for the remaining $1000 (50%).

Isn’t Partnering with a family member in a Real Estate Transaction a Prohibited Transaction?

Likely no if it the transaction is structured correctly. Investing in an investment entity with a family member and investing in an investment property directly are two different transaction structures that impact whether the transaction will be prohibited under Code Section 4975. The different tax treatment is based on who currently owns the investment. Using a Self Directed IRA LLC to invest in an entity that is owned by a family member who is a disqualified person will likely be treated as a prohibited transaction. However, partnering with a family member that is a disqualified person directly into an investment property would likely not be a prohibited transaction. Note: If you, a family member, or other disqualified person already owns a property, then investing in that property with your Self Directed IRA LLC would be prohibited.

3. Borrow Money for your Self Directed IRA LLC

You may obtain financing through a loan or mortgage to finance a real estate purchase using a Self Directed IRA LLC. However, two important points must be considered when selecting this option:

Loan must be non-recourse – A “prohibited transaction” is a transaction that, directly or indirectly involves the loan of money or other extension of credit between a plan and a disqualified person. Normally, when an individual purchases real estate with a mortgage, the traditional loan provides for recourse against the borrower (i.e., personal liability for the mortgage). However, if the IRA purchases real estate and secures a mortgage for the purchase, the loan must be non-recourse; otherwise there will be a prohibited transaction. A non-recourse loan only uses the property for collateral. In the event of default, the lender can collect only the property and cannot go after the IRA itself.
Tax is due on profits from leveraged real estate – Pursuant to Code Section 514, if your Self Directed IRA LLC uses non-recourse debt financing (i.e., a loan) on a real estate investment, some portion of each item of gross income from the property are subject to Unrelated Business Income Tax (UBTI). Debt-financed property” refers to borrowing money to purchase the real estate (i.e., a leveraged asset that is held to produce income). In such cases, only the income attributable to the financed portion of the property is taxed; gain on the profit from the sale of the leveraged assets is also UDFI (unless the debt is paid off more than 12 months before the property is sold). There are some important exceptions from UBTI: those exclusions relate to the central importance of investment in real estate - dividends, interest, annuities, royalties, most rentals from real estate, and gains/losses from the sale of real estate. However, rental income generated from real estate that is “debt financed” loses the exclusion, and that portion of the income becomes subject to UBTI. Thus, if the IRA borrows money to finance the purchase of real estate, the portion of the rental income attributable to that debt will be taxable as UBTI.

For example, if the average acquisition indebtedness is $50 and the average adjusted basis is $100, 50 percent of each item of gross income from the property is included in UBTI.

A Self-Directed IRA LLC subject to UBTI is taxed at the trust tax rate because an IRA is considered a trust. For 2011, a Self Directed IRA LLC subject to UBTI is taxed at the following rates:

$0 - $2,300 = 15%
$2,300 - $5,350 = $345 + 25%
$5,350 - $8,200 = $1,107.50 + 28%
$8200 - $11,200 = $1,905.50 + 33%
Over $11,200 = $2,895.50 + 35%

Self Directed IRA LLC

To learn more about using a Self Directed IRA LLC to invest in real estate, please contact one of our Self Directed IRA Experts at 800-472-0646 for more information.