Just like the IRA LLC rules allow for the distribution of cash, the same is true for the distribution of alternative investments owned by the IRA LLC. Alternative investments allowed in an IRA LLC include promissory notes, metals, tax liens, cryptocurrency, private placements and physical real estate, for example.
For this post, we will address the in-kind distribution rules applicable to physical real estate (e.g., family homes, apartments, condos, commercial real estate and land) owned inside an IRA LLC, whether a Roth IRA LLC or a Traditional IRA LLC.
Items to Consider When Taking In-Kind IRA LLC Distribution of Physical Real Estate
- The IRA LLC owned property first has to be assigned back to the self-directed IRA from the IRA LLC. Reason being, you are taking a distribution from the IRA not the LLC. Taking the distribution from the LLC would result in a prohibited transaction rendering the entire IRA subject to taxes.
- Before processing the the in-kind distribution of real estate, the property must be appraised by a third-party to ensure the correct amount of federal and state taxes are paid.
- Distributions including in-kind distributions of real estate from an IRA are taxed at earned income tax rates. Note: if the property is distributed from a Roth IRA, taxes may not apply if it falls under a qualified Roth IRA distribution.
- A 10% IRA early distribution penalty also applies if you are under age 59 1/2 at time of the distribution.
- Once inside the self-directed IRA, the real estate property will need be assigned from the IRA to your personal name, so you will also need to have the property re-recorded with the county recorder.
The End Result
Once distributed from the self-directed IRA, the property is now owned in your personal name. Therefore, you can now use it for personal, business or for investment purposes. All future income and expenses will not be paid with non IRA LLC funds.