React quickly in a competitive real estate buying market with a Real Estate LLC
A Limited Liability Company, or LLC, is a distinct legal entity. LLC owners, known as members, have “limited liability” meaning they receive liability protection, which is similar to a corporation. Creating an IRA LLC is one strategy IRA investors have used to purchase real estate. This gives you checkbook control — a term used when an IRA holder has complete signing authority over his or her retirement funds.
How Does an IRA LLC Work?
While you don’t have to create an LLC to invest in real estate in your IRA, an IRA LLC is a strategy some IRA holders use that gives them easy access to their funds, so they can react quickly in a competitive real estate buying market. An LLC that is owned by your IRA needs:
- A business checking account set up in its naming the name of the LLC.
- A tax ID number (EIN) for IRS tax filing.
- Articles of Organization for the LLC.
Once the LLC is formed, the IRA is made the owner or sole member of the LLC, and is managed by the IRA holder. The newly created business account is established under the name of the LLC which is funded by IRA assets and deposited into the checking account. Electing yourself “Managing Member” of the LLC, entitles you to a check book that is directly linked to the business checking account, giving you control over the funds. Your IRA is now invested in a legal entity that can purchase assets outright.
Before entering into this type of strategy, it is best to seek advice from your legal or tax advisor. Entrust does not advocate nor endorses this arrangement. Our purpose here is purely to expose you to the strategies other investors have taken to real estate investing in their IRAs. Entrust merely facilitates the requests of IRA holders who have chosen to enter into this type of arrangement.
What are the Benefits of Using a Real Estate LLC IRA?
- Cost—Checkbook control can help you avoid the transaction fees and check-writing fees typically associated with a self-directed IRA. If you own multiple real estate investments in your LLC, Entrust only charges you for one asset, the LLC.
- Convenience—once you identify an investment you want to purchase, you can just write a check. You don’t have to fill out paperwork or get approval from Entrust; you can take care of it yourself. You will still need to be aware of the prohibited transactions (IRC Sec. 4975) rules to avoid losing the tax favored status of your IRA.
LLCs must avoid prohibited transactions. Engaging in prohibited transactions causes the entire IRA to be taxable as of the 1st of the year in which the prohibited transaction occurs. This leaves the investor with unintended tax and penalties. It is up to you, as the IRA holder, to make sure that the IRA does not engage in activities that may jeopardize its tax-deferred status. See IRC § 408(e)(2) for more on transactions between an IRA LLC and disqualified persons.
How Do I Purchase a Property with an LLC IRA?
When buying property within an LLC that is owned by an IRA, it must meet the following requirements:
The LLC must ensure that all IRS and Department of Labor tax rules and requirements are met.
- If the LLC debt finances a property, the UDFI tax must be paid using IRS form 990-T.
- The LLC must distribute dividends to owners based on the ownership percentages outlined in the agreement.
- The LLC must be constructed properly.
Note: The Entrust Group does not sell or create LLCs. To learn about the specific requirements of forming an LLC, visit the IRS website or your local SBA district office for more information. We advise investors to seek proper legal counsel for an understanding of all requirements involved in LLC ownership.