Real estate is by far the most common investment held by IRA LLC’s, and for good reason.
The IRA LLC structure allows you to control the flow of money, execute agreements at a moment’s notice, maintain privacy, as well as benefit from a degree of limited liability protection.
But with this freedom comes a considerable responsibility Below you will find a few important things to remember when purchasing real estate throughout the IRA LLC structure:
- Once you have successfully established and funded your newly created IRA LLC, you may begin making offers of the properties of your choice as the manager of the LLC. However, you will want to make sure that any/all legal documents pertaining to the purchase, sale, exchange of the real estate must be in the name of the IRA LLC, and not the IRA owner personally – or – in the IRA accounts titling. Consequently, if a contract has already been accepted in the name of the IRA owner, then it must be scrapped and a new one drawn up; there can be absolutely no assignments from a disqualified person to the IRA or IRA LLC.
- The IRA owner, if acting as manager for the IRA LLC, may sign all agreements/contracts on behalf of the IRA LLC.
- If the account owner or any other disqualified person will be serving as agent to the transaction, then there may be no commission or compensation of any kind.
- Disqualified persons may not live-in, make use of, or perform work or services on the property.
- The IRA owner, LLC Manager, may oversee and direct the administrative and investment activities pertaining to real estate, e.g. lease agreements, repairs, insurance, etc. But they may not receive any compensation. Alternately, a property manager may be hired by the LLC to fulfill this role.
- The IRA LLC must pay for all initial and ongoing property expenses. It’s important that you do not run cash deficient, i.e. you don’t want to run in to a situation where the property needs emergency repairs, your IRA LLC is out of cash, and you’ve exhausted your personal IRA contributions for the tax year.
- If obtaining financing, the loan must be non-recourse. No personal guarantees may be made by a disqualified person.
- Income generated from a debt-leveraged (mortgaged) property will result in a UDFI tax liability. Deductions are provided and your CPA can assist in the calculation of this tax.
- Never use personal funds to pay for IRA LLC owned property expenses.
While it is recommended that anyone who funds an IRA LLC have an intimate understanding of the prohibited transaction rules, following the above guidelines should keep you out of 95% of the scenarios that can lead to trouble. For more information on the prohibited transaction rules click here.