A self-directed IRA LLC is commonly used to invest in real estate such as family homes, commercial real estate, farm land, condos, and rentals.
As with all IRA investments, certain rules when investing an IRA LLC in real estate, and running afoul of the IRA prohibited transaction rules can result in serious tax consequences.
Examples of Prohibited Self-Directed IRA LLC Transactions
For example, it would be prohibited to engage the IRA funded LLC in the following transactions:
A lease between the IRA LLC and the son of the IRA owner
Ben’s IRA LLC owns a duplex. One of the tenants is Ben’s son, Matt. As a party-in-interest, Matt’s leasing of the duplex results in an IRA prohibited transaction because children are disqualified parties.
Sale or exchange or leasing of any property between the IRA LLC and a disqualified person
Ben holds a parcel of land in his self-directed IRA LLC. He now wants to build his primary residence. Ben wires funds from his IRA LLC bank account to purchase the land. This investment would result in a prohibited transaction because Ben falls under the disqualified party category. You are not allowed to build your own home on a parcel of land owned by the IRA LLC.
We’ve put together the following do’s and don’ts to help guide IRA LLC investors in the self-directed IRA LLC real estate investment process.
Our solo 401K just foreclosed on a note and today got back the (fixer upper) property at the Trustee’s Sale, as no 3rd party bidders made a bid at today’s auction.
Can we legally sell this new REO property (owned by the solo 401k) to ourselves for a penny over the minimum bid amount we set in today’s auction?
Since the solo 401k invested in the promissory note (i.e., it was the lender/beneficiary) secured by real estate, in the event of default the property would be deeded to the solo 401k plan, resulting in the solo 401k now owning the property,
It would be prohibited for you to buy property owned by your solo 401k plan which would result in a prohibited transaction.
My solo 401K LLC is wanting to invest (buy) in a property (airport hangar lease) by being a member of an “Investment” LLC with 2 other members. None of the other two members are related parties or prohibited parties. In the “Investment LLC” the other 2 members don’t want to be the President and would like me to be the President. Is this possible and if so how?
I understand I can’t do any active work at the property although there is no physical structure. The property being purchased is a lot being “leased” from the airport authority for an aircraft hangar at the local airport. The planned investment would be to hold the lease that was acquired from the airport authority and resell the lease at a higher price in the future. Another option is we have a local builder come in to build a hangar at the builders expense on the leased property and then the builder sells the hangar/improvements and the “Investment LLC” assigns the lease at the time of the sale to the end buyer of the hangar for a higher price than the “Investment LLC” paid for the lease.
While a solo 401k or a solo 401k LLC may be invested in airport hangar leases directly or through a third-party LLC, it would not be prudent and the IRS may rule it as being prohibited for the solo 401k participant directly or through his solo 401k LLC to serve as the president and or manager of the third-party LLC (the LLC that will make the airport hangar investment). Reason being, the solo 401k participant would have signing authority both when making the investment through the solo 401k or the solo 401k in the third-party LLC (the LLC that will own the airport hangar or the lease) as well as signing authority for the third-party LLC. An IRS court case that is often referenced where the solo 40k owner sat at both sides of the table is Rollins v Commissioner (T.C. Memo 2004-260.)
Next to investing in real estate through a self-directed IRA LLC, investing in promissory notes is also a very popular self-directed IRA LLC investment. We have put together the following guide for review prior to investing your self-directed IRA LLC in promissory notes investments.
Learn how to Open a cryptocurrency account for your Self-Directed IRA LLC at ErisX.
Please check out our Webinar with John Denza, Chief Commercial Officer @ ErisX where we reviewed the benefits and features of the ErisX cryptocurrency exchange as well the steps required to open an ErisX account for your Self-directed IRA LLC to invest in digital currency such as Bitcoin, Ethereum, and other cryptocurrencies.
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