Remembering these tips will not only help you make more money, but they’ll also keep your friends at the IRS happy!
So I realize you might be wondering…
Why buy real estate investments with a Self-Directed IRA LLC in the first place?
A Self-Directed IRA LLC offers you the ability to use your retirement funds to make almost any type of investment on without the consent of anyone except yourself.
The IRS permits using a Self-Directed IRA LLC to purchase real estate or raw land. Making a real estate investment is as simple as writing a check from your Self-Directed IRA bank account.
The advantage of purchasing real estate with your Self-Directed IRA LLC is that all gains are tax-deferred until a distribution is taken (pre-tax 401k distributions are not required until you turn 70 1/2). In the case of a Roth Self-Directed IRA, all gains are tax-free.
For example, if you purchased real estate with your Self-Directed IRA LLC for $500,000 and you later sold the property for $800,000, the $300,000 of gain appreciation would generally be tax-deferred.
Whereas, if you purchased the property using personal funds (non-retirement funds), the gain would be subject to federal income tax and probably state income tax as well. (Which obviously sucks.)
The real estate investment legal tips you came for:
- Be aware of the IRS prohibited transaction rules. (This is first on the list for a reason!) The foundation of the prohibited transaction rules is based on the premise that investments involving IRA and related parties are handled in a way that benefits the retirement account and not the IRA owner.
- The rules prohibit transactions between the IRA and certain individuals known as “disqualified persons”. The outline for these rules can be found here in Internal Revenue Code Section 4975.
- The deposit and purchase price for the real estate property should be paid using Self-Directed IRA LLC funds or funds from a non-disqualified third party.
- No personal funds or funds from any “disqualified person” should be used.
- All expenses, repairs and taxes incurred in connection with the Self-Directed IRA real estate investment should be paid using retirement funds. No personal funds should be used.
- If financing is needed for a real estate transaction, only non-recourse financing should be used. A nonrecourse loan is a loan that is not personally guaranteed and whereby the lender’s only recourse is against the property and not against the borrower.
- With a Self-Directed IRA the use of a non-recourse loan would be subject to tax pursuant to Internal Revenue Code Section 514. The tax rate could reach 39%.
- No services should be performed by the IRA holder or “disqualified person” in connection with the real estate investment.
- Keep good records of income and expenses generated by the real estate investment
- All income, gains or losses from the Self-Directed IRA LLC real estate investment should be allocated to the IRA.
- Make sure you’re not engaging in any self-dealing real estate transactions, which would involve buying or selling real estate that will personally benefit you or a “disqualified person.”
If you have any questions about investing in real estate with a Self-Directed IRA LLC, Royal Legal Solutions is here to help you. Call us now at (512) 757–3994 to schedule your free no risk consultation today!