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Self-Directed Roth IRA LLC to Purchase Real Estate

Using a Self-Directed Roth IRA LLC to Purchase Real Estate

A Self-Directed IRA LLC to Purchase Real Estate is a wise choice. As you know in Self-Directed IRA LLC – How it Works, there are many benefits to establishing this type of retirement plan. Again, with the Self-Directed IRA, you can invest outside of traditional investments. This allows you to diversify your portfolio and better protect your assets/funds. As you may know, in the 2008 financial crisis, many retirement holders lost almost 25% of their retirement assets. As a result, diversification is steadily growing in popularity. Plan participants realize they don’t have to invest in Wall Street.

To point out, alternative investments, such as real estate, have always been possible IRA investments. Yet prior to 2008, very few people knew about self-directed retirement plans and alternative assets. The small group wasn’t that was knowledgeable of this didn’t get hit as badly by the financial crisis.

Use Your Self-Directed IRA LLC to Purchase Real Estate

Real estate has become one of the most popular forms of non-traditional assets to invest in. Why do you think that is? First off, people want to invest in what they know and understand. Many individuals have more knowledge and confidence in real estate, which is one reason they are investing in it. Another reason is because investing in a real, material asset can protect their retirement savings from the threat of inflation.

And did you know that all income and gains from real estate is tax-free? That’s right. Real estate owned in a self-directed IRA LLC is tax-exempt. To fully grasp the financial benefits of this aspect, let’s look at an excerpt from Self-Directed IRA in A Nutshell.

“…If you purchased a piece of property with your self-directed IRA for $100,000 and you later sold the property for $300,000, the $200,000 of gain appreciation would generally be tax-free. Whereas, if you purchased the property using personal funds (nonretirement funds), the gain would be subject to federal income tax and, in most cases, state income tax.”

Here’s an even better example: Joe Average establishes a Self-Directed IRA LLC with $100,000 to purchase real estate. He also plans to make other traditional/non-traditional investments. Joe Average keeps his self-directed IRA LLC open for 20 years.

Over the years, he was able to generate an average annual pre-tax return of 8%. The average tax rate is 25%. By using a tax-deferred IRA LLC strategy, 20 years later, Joe’s $100,000 investment is worth $466,098. That’s $349,572 after taxes. But if Joe makes the investment with taxable funds (non-retirement funds) he only makes $320,714 after 20 years.

Checkbook Control Self-Directed IRA LLC

Most financial institutions don’t allow real estate investments. In the end, the IRA custodian makes the decision in what you can invest in with your retirement plan. However, a checkbook controlled self-directed IRA LLC, you are the manager of the LLC, and can make decisions on what to invest in. Of course, this includes real estate.

For reiteration (you can find this information in our other Self-Directed IRA LLC pages), now making investments is quick and easy. You no longer pay high custodian fees or must wait as custodians approve (or deny) your investments. With checkbook control self-directed IRA LLC, you write a check or wire funds from your IRA LLC bank account, and the investment is yours.

Real Estate Investments

Below, we provide a partial list of domestic or foreign real estate investments you can make with your 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

Your Tax is Due on Profits from Leveraged Real Estate

Following Code Section 514, if your Self-Directed IRA LLC uses non-recourse debt financing (for example, 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, such as a leveraged asset that is held to produce income. In such cases, only the income payable to the financed portion of the property is taxed. Gain on the profit from the sale of the leveraged assets is also UDFI. That is, 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, such as:

  • Dividends
  • Interest
  • Annuities
  • Royalties
  • Most rentals from real estate
  • Gains/losses from the sale of real estate

However, rental income from real estate that is “debt financed” loses the exclusion. That portion of the income becomes subject to UBTI. Therefore, 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 owed 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 2018, a Self-Directed IRA LLC subject to UBTI is taxed at the following rates.

Rates:

  • $0 – $2,550 = 10% of taxable income
  • $2,551 – $9,150 = $255 + 24% of the amount over $2,550
  • $9,151 – $12,500 = $1,839 + 35% of the amount over $9,150
  • $12,501 + = $3,011.50 + 37% of the amount over $12,500

Invest in Real Estate with a Self-Directed IRA LLC Today! When you purchase real estate with a Self-Directed IRA LLC, it’s very similar to when you purchase real estate personally. Let our IRA specialists establish your self-directed IRA LLC.

  1. Set-up a Self-Directed IRA LLC with the IRA Financial Group.
  2. Identify the investment property.
  3. 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).
  4. The title to the investment property and all transaction documents must be in the name of the Self-Directed IRA LLC. The LLC manager must sign the documents pertaining to the property investment.
  5. All expenses paid from the investment property go through the Self-Directed IRA LLC. Likewise, all rental income checks go directly into the Self-Directed IRA LLC bank account. No IRA
  6. investment checks will deposit into your personal accounts.

All income or gains from the investment flow through to the IRA tax-free!

Let’s get started! Contact IRA Financial today.

Did you know?

You should form your Self-Directed Roth IRA LLC in the state where the real estate will be located.

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