Investing IRA LLC in a Promissory Note

Whiled an IRA LLC may be invested in promissory notes including mortgage notes, the note investment must be documented via a note. Also, the IRA LLC must receive an interest rate based on the borrower’s credit history since the purpose of investing the IRA LLC in notes is to grow your IRA.  You can work with title companies or the borrower in obtaining a note document, and make sure to list the following items on the note, for example:
  • List the IRA LLC as the lender/beneficiary;
  • List the borrower;
  • List whether the note is secured or unsecured;
  • List if the note payment terms–for example, interest only with a final balloon payment, or principal and interest; quarterly or monthly payments;
  • List the consequences in the even note default; and
  • you sign as the manager of the IRA LLC and the borrower also signs.
As the manager of the IRA LLC, you safe-keep the note investment paperwork.
The note payments flow back to the IRA LLC not the self-directed IRA.

Note vs Equity Investment

One advantage of investing the self-directed IRA LLC in  promissory notes including private lending to a an entity that flips homes is that UBIT does not apply because your IRA LLC is effectively playing the lender roll similar to a bank. 

UBIT Defined

Unrelated Business Income Tax (UBIT) is assessed when a tax-exempt entity, such as an IRA or solo 401k plan engages in a business activity that is not related to its general purpose
For this reason, self-directed IRA LLC and solo 401k investors will invest via a promissory note in an active business or flipping business instead of via an equity investment so as to avoid UBIT.

Self-Directed IRA LLC Note Investment FAQs:

Lend to Real-Esate Flipping Business QUESTION:

I plan to lend my Roth IRA LLC funds to an entity that flips homes. Will this investment trigger any taxes to my Roth IRA?

No as long as neither your nor certain family members (e.g., spouse, parents, children, etc.) are the owners of the business, and  it is not an equity investment but rather a promissory note investment. As mentioned above, even if the borrowing entity invests does business activity, UBIT will not apply to the ROTH IRA LLC note investment.  interest income attributable to your IRA’s promissory note investment is not subject to UBIT provided that the interest is not tied to the underlying performance of the investment (i.e. the flip).

Lend to My Personal LLC QUESTION:

Can our ROTH IRA LLC lend (unsecured funds) to my Standard LLC to purchase a Real estate at nominal IRS mandated interest rate? Are there any rules we need to be aware about?

No. Reason being, in addition to the account owner falling under the disqualified party umbrella, this same rule applies to the IRA owner’s spouse, children, parents and entity that he or she controls or has a personal ownership in.  This rule applies regardless if the loan is at a fair market interest rate. Such transaction would be considered a prohibited transaction per the following section found in I.R.C 4975:

  • “Lending of money or extending credit between a plan and a disqualified person.”