The IRS has always permitted an IRA to purchase or hold real estate or raw land. With a Self-Directed IRA LLC, you will be able to purchase raw land, domestic or foreign real estate, residential or commercial property and much more tax-free and without requiring custodian consent!
With a Self-Directed IRA LLC, 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 real estate investment decisions on behalf of your IRA. One major advantage of purchasing real estate with a Self-Directed IRA is that all income and 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. In addition, if the IRA real estate investment generated income (i.e. rental income), all income would flow back to the IRA tax-free!
How Does it Work?
Setting-up a Self-Directed IRA LLC to purchase real estate is quick and easy. Our IRA Experts will take care of everything for you.
1. Transfer of Funds
Our IRA Experts will assist you in transferring your retirement funds tax-free from your current custodian to a new FDIC backed/IRS approved Passive Custodian that allows for real estate investments using retirement funds. By using a Self Directed IRA LLC with “checkbook control” you can take advantage of all the benefits of tax-free real estate investing without incurring excessive custodian fees and custodian created delays.
All the Passive Custodians we work with are FDIC backed and IRS approved. Once your custodian has transferred your retirement funds to the Passive Custodian, the Passive Custodian will immediately transfer your funds to your new IRA LLC where you as manager of the LLC will have “Checkbook Control” over those funds to make real estate investments tax-free!
2. Formation of New Self-Directed IRA LLC
Our in-house tax professionals will form your customized Self-Directed IRA LLC in the state of your choosing. Typically the LLC is formed where the real estate investment will be made. This is because all states generally take the position that an entity owning real estate in a state will be deemed to be engaged in a trade or business in that state and will, thus, be required to file to do business in the state. As a result, the LLC is typically formed in the state where the LLC will be making the real estate investment so as to know incur dual LLC filing fees.
3. Open a local bank account for the New IRA LLC
Our tax professionals will provide you with the appropriate LLC documents so you can open your IRA LLC checking account at any bank or credit union of your choice.
4. Transfer of IRA Funds to New IRA LLC Bank Account
You, as IRA owner, will direct the Passive Custodian to transfer the IRA funds to your new Self-Directed IRA LLC bank account. The IRA would then become a member of the Self-Directed IRA LLC.
5. Appointment of Manager of the IRA LLC
As the Manager of the Self Directed IRA LLC with “Checkbook Control”, you will have the freedom to make your real estate investment. As Manager of the Self Directed IRA LLC, you will be able to write a check or wire money from the LLC bank account to make your real estate Investment.
6. Real Estate Investment is Made
As manager of the LLC, you will have the authority to make the real estate investment on behalf of your IRA LLC. The real estate investment must be made in the name of your Self Directed IRA LLC. All income and gains generated by your real estate investment will generally flow back to the IRA tax-free!
Paying for Expenses & Repairs for your Real Estate Investment with an IRA
Just like all income and gains associated with the real estate investment must flow-back to your IRA LLC, all expenses, taxes, repairs, and improvements associated with the real estate investment must be paid using IRA funds. As a result, it is important to have sufficient IRA funds in order to cover any such real estate relates expenses or improvements. Of course, you can always make an annual IRA contribution of $5,000 ($6,000 if you are over 50) to help cover any real estate related expenses. Note – the use of personal funds to pay for any IRA investment related expense would likely trigger a prohibited transaction pursuant to Internal Revenue Code Section 4975.
Using Leverage to Purchase Real Estate with an IRA
Pursuant to Internal Revenue Code Section 514, if an IRA uses debt to acquire real estate, the debt-financed portion of the property is treated as unrelated business taxable income (“UBTI” or “UBIT”). The UBTI tax rates mirror the Trust tax rates, which is approximately 35%.
If an IRA owns “debt-financed property”, some portion of each item of gross income from the property, and a like portion of all related deductions, are included in unrelated business taxable income, whether the income is in the form of rent, interest, gain on disposition of the property, or some other character. Property is debt-financed if it is held for the production of income, its use is not substantially related to the organization’s exempt purposes, and there is acquisition indebtedness with respect to the property. The term “acquisition indebtedness” generally includes any liability incurred before, contemporaneously with, or after the acquisition or improvement of the property if it arose because of the acquisition or improvement or if the need for the indebtedness was foreseeable at the time of the acquisition or improvement.
The application of Internal Revenue Code Section 514 has a wide application. For example, it has been held that debt used to finance a real estate purchase or securities purchased on margin can be debt-financed property.
For additional information on the advantages of using a Self-Directed IRA LLC with “checkbook control” to make real estate investments, please contact one of the IRA Experts from the IRA Financial Group at 800-472-0646.