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For April's national webinar we discussed the 3 special real estate investment strategies for self-directed IRA investors. Participants who joined our free webinar had the opportunity to ask Bill Neville, our Business Development Manager, questions regarding their real estate investments, IRA LLCs, prohibited transactions, and more. Continue reading to see what types of questions were answered...
Q: If there is not quite enough cash in the IRA LLC to purchase a property, what is the process to make up the difference with personal funds? Say, if it was a 80/20 split?
A: Some of the ways of purchasing a property when your IRA does not have enough cash is either partnering with an unrelated party or acquiring a non-recourse loan. There will be taxation on income derived from the portion that was borrowed to purchase the property called Unrelated Debt Financed Income( UBIT).
Q: If a property is held at the time of a Required Minimum Distribution (RMD), how is ownership doled out to personal interests?
A: Distributing a portion of the property is not the only way to handle RMDs in an IRA that holds real estate. Distributing cash earnings is also an option to satisfy the minimum distribution required. There is also the option of merely paying the 50% penalty on the amount of the RMD.
Q: What if you want to use your real estate as an Airbnb property?
A: A piece of real estate owned by an IRA can be used as an Airbnb. Typical Airbnb incomes are treated as rent therefore not taxable under an IRA.
Q: Does the homeowner’s insurance policy and utilities need to be put in the name of the IRA or can they be put in your personal name as long as the fees are paid by the IRA?
A: Since the property is owned by the IRA, it should be under the IRA’s name.
Q: Can the LLC own more than one piece of property? Or is it one LLC for each piece of property?
A: Yes, an LLC in which an IRA invests in can hold more than one property.
Q: As a disqualified person, does that mean that I can't perform any "minor" maintenance or repairs to the property?
A: No service should be performed by a disqualified person on the investment.
Q: I have a Roth IRA account, do I still pay UDFI tax when taking a non-recourse loan?
A: Yes, there is UDFI tax even if the investment is under a Roth and the investment is leveraged.
Q: We are 64 and interested in buying with an IRA LLC (a tree farm with timber which will not be ready to be cut for 12 years.) How do we distribute the title to the land over a period of years? Should we set up a "dba" company and let the dba company purchase the property? Could the LLC own all shares of the dba company and then, at the time of mandatory distributions, distribute those shares to the account owner over a period of years?
A: Having an IRA invest in an LLC is more of a legal issue that needs to be discussed with your legal advisor. As far as RMDs, if you have other IRAs you may satisfy your RMDs from other IRAs. Another option in lieu of distributing an RMD is just by paying the 50% penalty on the RMD. One thing to consider is between the federal and potential state tax the tax liability is close to 50% which is the RMD penalty.
Q: If my LLC partners with myself to purchase a new investment, am I allowed to personally work on the property?
A: It would not be advisable to avoid crossing the line of a conflict of interest.
Q: We are considering buying a condo in Costa Rica which will be managed by the condo itself, totally hands off by me. I know I cannot stay in the property myself. Can I rent a condo in the same building for vacation?
A: Any indirect benefit you personally receive for investing using your IRA will be considered a conflict of interest.
Thank you to everyone who participated in our national webinar. We encourage our readers to post any additional questions regarding self-directed IRAs or retirement planning in the comments section below. You can view the full recording of this webinar here to get answers to questions which are not listed in this article.