When an LLC is 100% owned by an IRA or combination of IRAs, it is commonly referred to as a Self-Directed IRA LLC or IRA LLC. While an IRA owns the LLC through the purchase of member units, it’s important to note that the same prohibited transaction rules applicable to the IRA generally apply to the IRA owned LLC.
Self-Directed IRA owned LLC stems from famous court case
The tax court ruled in favor of a taxpayer in Swanson versus the Commissioner, 106 Tax Court 76, 1996, essentially ruling that the initial full investment in an entity by an IRA was not prohibited. In this particular court case, Swanson’s IRA was the sole investor/shareholder in a Corporation. As a result, the tax court ruled that since Swanson’s IRA was the initial investor in the corporation (i.e., the corporation had not previously issued any shares prior to Swanson’s IRA purchase of corporation shares) it was not considered a prohibited transaction. In sum, based on the Swanson court case and Field Service Advisory 2001-28011, the purchase of units in an entity such as an LLC or purchase of shares in a C-Corporation by a self-directed IRA or/and the IRA owner is not prohibited provided the units or share are issued for the first time and the purchase is made simultaneously.
The Self-Directed IRA LLC
Deemed single member for tax filing purposes – An LLC that is solely owned by IRAs is considered a single member LLC for tax filing purposes; therefore, the IRA LLC does not file a tax return. However, the IRA is subject to filing a tax return (Form 990T) in the event that UBTI or UDFI taxes are generated.
Why a Self-Directed IRA LLC?
There are many reasons why the self-directed IRA LLC is the investment vehicle of choice for investing retirement funds, including the following:
Besides still retaining option to invest in equities (stocks and mutual funds), since 2002 the self-directed IRA owned LLC has steadily grown in popularity as the common form of business for placing real estate purchases in addition to tax liens, precious metals, trust deeds and private company shares, to name a few.
Checkbook Control over Retirement Funds
A self-directed IRA LLC is manager managed as opposed to member managed. As such, as the named LLC manager, you are in full control over placing the LLC IRA investments in any investment not prohibited under the IRS regulations. IRA LLC investment purchases are generally made by writing a check from the LLC checking account and processed in the name of the LLC.
Reduced Fees and Timely Place Investments
While alternative investments also may be placed directly through a Self-Directed IRA opened through a self-directed IRA custodian such as Equity Trust and Pensco Trust, which was the dominant method up until the last 5 years, instead of using a Self-Directed IRA owned LLC, more and more IRA investors are opting for the Self-Directed IRA owned LLC to greatly reduce processing fees, holding fees and to process time-sensitive investment purchases such as real estate and tax liens.
How does it Work?
After transferring retirement funds such as 401(k), 403(b) and IRAs to the new self-directed IRA and then capitalizing the self-directed IRA owned LLC, start placing alternative investment purchases by writing checks directly from the LLC checking account. A Self-Directed IRA LLC results in flexibility to invest retirement funds while still taking advantage of the tax benefits offered under the traditional IRA and Roth IRA.