Investing a self-directed IRA LLC in real estate is similar to investing a self-directed IRA in real estate in that the same IRS prohibited transaction and IRA rules apply.
That being said, here is a helpful procedure for investing an IRA LLC in real estate.
- First open a self-directed IRA with a custodian that will hold the IRA funded LLC on their books, as the IRA custodian will need to report the value of the IRA owned LLC on Form 5498 and only the IRA custodian can perform this IRS required function.
- Open the LLC using the services of an IRA LLC provider such as My Solo 401k Financial.
- Fund the self-directed IRA by transferring a former employer plan such as a 401k, 403b, TSP, 457b, and defined benefit plan, as well as other IRAs.
- Setup the LLC bank account and direct the self-directed IRA custodian to send the funds to the newly funded self-directed IRA LLC.
- Once you identify that property for purchase, make the offer in the name of the newly funded IRA LLC and make the earnest deposit by wiring funds from the LLC bank account to the escrow company.
- Finish investing the IRA LLC in the new property by wiring the rest of the funds from the IRA LLC bank account directly to the title company.
- After the purchase and going forward, pay property expenses (insurance, property taxes, repairs, maintenance, etc.) using IRA LLC funds, and deposit all rental income and proceeds from the sale of the property into the LLC bank account.
Self-Directed IRA LLC Real Estate Investment FAQs:
In-Kind IRA LLC Distribution QUESTION:
Is there a protocol to “undue” a house purchase (e.g., within 30 days) if latent conditions prove that it’s not feasible to own the house under the IRA LLC?
You would need to transfer ownership of the LLC to the self-directed IRA “free and clear” (including re titling the property in the name of the self-directed IRA custodian for the benefit of your IRA) and then take an in-kind distribution from the IRA which would be a taxable distribution (based on the fair market value of the property and a second re titling).
Travel Expenses QUESTION:
Can travel-related expenses be picked up under the IRA LLC? (it costs money to travel to other cities and states to look at potential property investments. Normally, those expenses can be filed for tax deductions, but for this plan, there are no income taxes to file until retirement when I begin to take distributions)
No. While certain expenses (e.g., property taxes, cost for repairs, etc.) associated with the the IRA LLC house/building investment must be paid with funds from the IRA LLC bank account, travel expenses and meals are not allowed to be paid with IRA LLC funds.
Taking Title to Property QUESTION:
When submitting an offer on a property and then executing the purchase is it correct to assume all paperwork is done by the LLC and executed by the manager?
Since the real estate investment is being made through the LLC funded IRA, title to the property needs to be taken in the name of LLC. As the manager of the LLC, you sign all the real estate purchase and related documents (e.g., property insurance documents).
Purchasing the Property QUESTION:
Now that the bank account is funded by the IRA, do I need to do anything special with regard to purchasing the property? Do I Just write the purchase check out from the LLC bank account? Do I need to let the title company know it’s purchased through an IRA? They are aware it’s being purchased through an LLC ?
Now that the LLC has been funded via the self-directed IRA, future real estate investments will be made through the LLC directly.
Title will also be taken in the name of the LLC not the self-directed IRA custodian. The title company does not need to be informed that the LLC member is the self-directed IRA but you can certainly disclose it if they ask, but it may confuse them and the title company generally does not ask directly since the LLC is making the purchase not the IRA.
No UDFI QUESTION:
Say if I set up a llc and use my funds to purchase a mobile home outright with no loan as an investment, I won’t be charged the udfi tax correct or any penalties?
You are correct that unrelated debt-financed income tax (UDFI) does not apply to an IRA LLC that invests in a mobile home if debt financing/non-recourse loan financing is not used.
Proceeds from the Sell QUESTION:
What happens when I sell the home in regards to the funds? Do the funds go back into the llc account?
Just like the rent payments flow back to the LLC bank account, the same is true with respect to the proceeds from the sell of the mobile homer and/or real estate. As long as the sell proceeds are deposited into the LLC bank account, the funds will continue to grow on a tax deferred basis.
