A Self-Directed IRA LLC is a Traditional IRA that allows investors to use retirement funds for virtually any investment without custodian consent. As a result, plan participants can make an investment as quickly as writing a check from the LLC bank account.
The IRS and Department of Labor do have types of investments that are prohibited, but they are very few. Investments you cannot make with a Self-Directed IRA LLC can be found under IRC section 4975 – prohibited transactions.
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 you take out a distribution. In the case of a Roth Self-Directed IRA, all gains are tax-free.
For example, if you purchase a piece of property with your IRA for $100,000 and you later sell the property for $300,000, the $200,000 of gain appreciation is generally tax-deferred. Whereas, if you purchase the property using personal funds (non-retirement funds), the gain is subject to federal income tax, and in most cases, state income tax.
Self Directed IRA LLC Real Estate Tips:
Here are our Self-Directed IRA LLC tips if you’re using, or plan to use, your retirement funds to invest in real estate.
Understand the IRS Prohibited Transaction Rules
It’s very important to learn the prohibited transaction rules before buying real estate with your IRA. The prohibited transaction rules were created so transactions can benefit the retirement account and not the IRA owner personally.
When it comes to real estate, an IRA holder or any disqualified person may not be personally involved or benefit directly or indirectly from a real estate transaction.
Let’s take a look at the above example. You, the IRA holder, purchases a property with your retirement funds. You decide to rent it out to your mom, who is a lineal descendant. In other words, a disqualified person. This will trigger the prohibited transactions.
However, let’s assume you purchase property with your retirement funds and rent it out to a tenant you have no relation to – in other, a non-disqualified person. This transaction is permitted. The funds from this transaction will then go to your This is the primary way to earn income from a real estate investment.
Serving as Realtor or Agent on Real Estate Purchase
Internal Revenue Code Section 4975(c)(1)(C) states that the direct or indirect furnishing of goods, services, or facilities between an IRA and a “disqualified person” would be considered a prohibited transaction. Thus, if a disqualified person, such as the IRA holder, serves as a real estate broker or listing agent on a transaction involving retirement assets, such as a self-directed IRA LLC, the payment of commissions/fees would violate Internal Revenue Code Section 4975(c)(1)(C) and would, thus, be considered a prohibited transaction.
If you are a real estate agent using a self-directed IRA to make real estate investments, make sure you or any other disqualified person serves as real estate agent or listing agent on the transaction.
Funding a Real Estate Investment
When it comes to funding the real estate investment, you can’t use funds from any disqualified person. Additionally, you must make all expenses, repairs and taxes in connection with the IRA real estate with retirement funds – not personal funds. If other expenses are necessary, funding must come from the IRA or from a non-disqualified person.
And when you’re in need of a loan, use non-recourse financing. A non-recourse loan is a loan that is not personally guaranteed. The lender’s only recourse is against the property, not the borrower. With a SDIRA, using a non-recourse loan is subject to tax. Tax rates can reach as high as 39%.
Performing Services with Your Investment
You should never perform services in connection with the real estate investment – neither can a disqualified person. Furthermore, you should not perform any active services with respect to the real estate investment you make with your IRA.
How to Title the Real Estate
When you purchase real estate with your IRA, you must put it in the name of the Self-Directed IRA LLC. For example, Joe Smith establishes a Self-Directed IA LLC and names it LLC XYZ. The title to any real estate he purchases is as follows: XYZ LLC.
Income, Gains and Losses
It’s always important to keep a good record of income and expenses you generate from the real estate investment. Whatever gains or losses that occur from the Self-Directed IRA LLC real estate investment should be allocated to the IRA.
Do Your Research
This Self-Directed IRA LLC Real Estate tip may go without saying: do your research. Perform adequate diligence on the property you purchase, especially if it’s in a state you don’t live in.
Get in Touch
Do you still have questions about buying real estate with your IRA that were not mentioned in this article? Contact IRA Financial Group at 800-472-0646. Or fill out the form to speak with a self-directed IRA specialist.