Last Updated on February 9, 2021
Learn why the Real Estate IRA LLC may be right for you if you’re looking to buy real estate with your IRA.
The IRS (Internal Revenue Service) has always permitted IRA to hold real estate. In this IRA Financial Group article, we’ll explain why you may want to buy real estate with your real estate IRA LLC.
A Real Estate IRA LLC for Real Estate Investments
When you use a real estate IRA LLC, gains are tax-free. Additionally, there no time limit for holding property. Other advantages include:
- Positive cash flow is tax free
- IRA can borrow money – Leverage your investment with non-recourse financing
- Potential to earn a larger rate of return on invested capital
- Invest in what you know and understand
- Diversify your retirement portfolio from over-exposure to Wall Street
- Protect your retirement funds from inflation or a falling U.S. dollar
- Invest your retirement funds in hard assets
It’s All About Tax-Free Growth
When you purchase real estate with a Self-Directed Real Estate IRA LLC, income and gains you generate with a pre-tax retirement account flow into the retirement account tax-free. Instead of paying tax on the returns of a real estate investment, you pay tax at a later date. As a result, the real estate investment can grow rapidly.
Typically, people make Self-Directed IRA real estate investments when they earn high income. And this is taxed at a higher rate. Withdrawals are made from an investment account when a person is earning little or no income and is taxed at a lower rate.
Real Estate You Can Purchase with a Self-Directed IRA
You can make almost any investment with a Self-Directed IRA, or Real Estate IRA LLC. The IRC (Internal Revenue Code) doesn’t state what a Self-Directed IRA LLC can invest in. What it states is what the IRA cannot invest in. Additionally, the IRC prohibits you from engaging in certain transactions with a Disqualified Person. This differs from what the IRC prohibits you from investing in; below is a partial list of investments you can make with a Self-Directed IRA LLC:
- Raw land
- Residential homes
- Commercial property
- Mobile homes
- Real estate notes
- Real estate purchase options
- Tax liens certificates
- Tax deeds
How Does the Real Estate IRA LLC Work?
Below is a step-by-step breakdown of how you can use a Self-Directed IRA or checkbook IRA to make a loan to a non-disqualified person:
- Establish Self-Directed IRA with an IRA custodian or trust company that allows for alternative asset investments, such as IRA Financial Trust.
- Transfer or Rollover your retirement assets that you will be using for investment tax-free to the new IRA custodian.
- A special purpose LLC will be established that the IRA will own.
- Establish a bank account for your LLC. You will need to have the LLC article of formation, a Tax ID#, as well as a self-directed IRA LLC operating agreement.
- Notify the IRA custodian that you wish to have the funds sent to the new LLC bank account. The IRA assets/cash will then go to the LLC tax-free in exchange for 100% interest in the LLC
- You as manager of the LLC will then have checkbook control over all the assets/funds in the IRA LLC to make the investment
- Send the funds to the borrower as part of a loan agreement or promissory note. You have the option of having a secure loan or not. From the terms of the loan, the borrower will send the interest and principal payments back to the LLC.
- Since the IRA owns the LLC, the LLC it’s seen as a disregarded entity for federal income tax purposes. No federal income tax return will be necessary for filing. All income and gains from the real estate investments will flow back to the IRA without tax.
Using a Real Estate IRA LLC (Self-Directed IRA for real estate) can now be funded by tax-free rollover from any IRA or 401(k) retirement plan.
To learn more about how to use a Self-Directed IRA LLC, please contact a Self-Directed IRA Expert at 800-472-0646. Or fill out the form at IRA Financial Group.
Q For You:
Will you use a Real Estate IRA LLC to make all of your future real estate investments? Let us know!