Tips For Buying Real Estate With A Self-Directed IRA LLC And Staying Out Of IRS Trouble

A Self-Directed IRA LLC offers one the ability to use his or her retirement funds to make almost any type of investment on their own without requiring the consent of any custodian or person. The IRS and Department of Labor only describe the types of investments that are prohibited, which are very few.

The IRS permits using a Self-Directed IRA LLC to purchase real estate or raw land. Since you are the manager of the Self-Directed IRA LLC, making a real estate investment is as simple as writing a check from your Self-Directed IRA bank account. The advantage of purchasing real estate with your Self-Directed IRA LLC is that all gains are tax-deferred until a distribution is taken (pre-tax 401(k) distributions are not required until the IRA holder turns 70 1/2). In the case of a Roth Self-Directed IRA, all gains are tax-free.

For example, if you purchased a piece of property with your Self-Directed IRA LLC for $100,000 and you later sold the property for $300,000, the $200,000 of gain appreciation would generally be tax-deferred. Whereas, if you purchased the property using personal funds (non-retirement funds), the gain would be subject to federal income tax and in most cases state income tax.

Helpful Tips:

A Blueprint for What a Self-Directed IRA Real Estate Investor Can and Cannot Do

The Cherwenka case (In Re Cherwenka (113 AFTR 2d 2014-2333) (508 B.R. 228), (Bktcy Ct GA), 03/06/2014) involved a Georgia statutory bankruptcy estate exemption for IRAs, which covered a Self-Directed IRA held by Michael Cherwenka, who was in business of “flipping” houses. Michael Cherwenka established a Self-Directed IRA to buy real estate. The Cherwenka case is really the first case that offers a detailed framework about the type of activities or tasks a Self-Directed IRA real estate investor can perform without triggering the IRC 4975 prohibited transaction rules. In the case, Cherwekna was not compensated for any real property research he performed, nor was he compensated for any recommendations, management or consulting services he provided relating to how the IRA properties were improved before resale. Cherwekna explained his role in buying and selling of these properties as being limited to identifying the asset for purchase and later selling the asset. Cherwenka engaged contractors to decide or oversee the scope of work which improved properties. Cherwenka testified that he “read and approved” the expense forms prior to the IRA custodian paying funds to reimburse the submitted expenses. Contractors were paid by the job, which accounted for labor costs, but no management fee or additional cost was included in the expenses submitted to the IRA custodian. Cherwenka stated he would inspect or confirm that work was completed through site visits or communication with his “team” before he would approve expenses to be paid by the IRA custodian.

Because most Self-Directed IRA real estate investors tend to perform the same sort of tasks that Cherwenka performed, such as locating the property, reviewing transaction documents, engaging contractors to perform property improvements, inspection of improvements, approval of expenses, and coordinating with the IRA custodian regarding the real estate, the case offers a clear blueprint for the type of activities or tasks that a Self-Directed IRA real estate investor can do without violating the IRC Section 4975 prohibited transaction rules.

To learn more about using a Self-Directed IRA to purchase real estate, please contact a Self-Directed IRA expert at 800-472-0646.

You may also find the following links helpful

Is a Self Directed IRA LLC IRS Approved?

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