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 only describes the type of investments that are prohibited, which are very few.
IRA Financial Group reviews the tax advantages of using a self-directed IRA LLC to buy real estate. The IRS permits using a Self-Directed IRA LLC to purchase real estate or raw land. Real estate is the most popular investment made with a Self-Directed IRA. Making a real estate investment is as simple as writing a check. Since you are the manager of your Self-Directed IRA LLC, you have the authority to make investment decisions on behalf of your IRA. One major advantage of purchasing real estate with a Self-Directed IRA is that all gains are tax-deferred until a distribution is taken (Traditional IRA distributions are not required until the IRA owner turns 70 1/2). In the case of a Self-Directed Roth IRA LLC, all gains are tax-free.
For example, if you purchased a piece of property with your Self-Directed IRA for $75,000 and later sold the property for $150,000, the $75,000 of gain would generally be tax-free. Whereas, if you purchased the property using personal funds (non-retirement funds), the gain would be subject to federal income taxes and in most cases state income tax.
When using a self-directed IRA to buy real estate, the main advantages are as follows:
- Gains are tax free
- Positive cash flow is tax free
- No time limit for holding property
- IRA can borrow money – Leverage your investment with non-recourse financing
- Potential to earn a larger rate of return on invested capital